Money tucked away for emergencies can provide peace of mind if an unplanned expense arises. Financial experts often recommend maintaining savings equal to three to six months’ worth of costs—but is that enough? Is it too much?
The ultimate answer depends mainly on your financial situation and how much you need to keep in savings to feel secure. Once you decide on a savings target, you can work on building up your cash cushion.
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How Much Should I Have in Savings?
Understanding your expenses starts with finding the right amount of money to keep in savings. There are two primary types of costs you should budget for: fixed and variable.
Fixed expenses stay roughly the same month to month. These may also be your most important bills. Examples of fixed expenses include:
- Rent/mortgage payments
- Utility bills
- Internet and cellphone service
- Insurance
You could also include debt payments in this category if you pay the same amount to debt each month. Any required alimony and child support payments you’re making would also go here.
Variable expenses are costs that fluctuate from month to month. These can be essential or nonessential expenses. Examples of variable expenses include:
- Groceries
- Gas and transportation costs
- Entertainment
- Hobbies
- Clothing
- Travel
- Dining out
Once you’ve estimated your typical monthly expenses, there are two ways to apply the three-to-six-month rule of thumb for savings. You can base your emergency savings target on your total expenses—or on your budget if you opted to cut out some of your variable spending.
The more nonessential costs you can reduce or eliminate, the further your savings may go.
Fine-Tuning Your Savings Goal
The amount of money you need in savings can depend on circumstances. Generally, you want enough to handle a financial emergency, which is any big, unanticipated expense that pops up.
There are one-time emergencies, like an unexpected vet bill or car repair. These expenses can run from a few hundred to a few thousand rupees. Other financial emergencies may be ongoing and require more savings. Extended emergencies can include losing a job or being unable to work because of an illness or injury.
Say you get laid off from work. It might take three months to find another job at your same salary or higher. The amount of savings you’ll need can depend on what you anticipate spending while you’re out of work.
Your fixed expenses stay the same, but your variable spending might drop if you cut out unnecessary costs. So, assume you typically spend INR 10,000 monthly on all your expenses, including INR 2,000 for nonessentials. You curb all discretionary spending, increasing your overall costs to INR 6,000 per month.
That means you’d need to have INR 18,000 saved to cover your three-month employment gap. If you expect to be out of work for up to six months, you’d need INR 36,000 in savings.
You could be proactive and save nine to 12 months’ of emergency expenses. Your savings target would be INR 54,000 to $72,000 in that case. Whether it makes sense to put that much money aside depends on how long it might take to land a new job after a layoff and how much money you’d need to feel comfortable.
Ways to Save Money Faster
If building up savings is a priority, you can try several methods to increase your balance faster.
Start by reviewing your budget to look for places you might painlessly cut spending. Some of the ways you could squeeze out extra money for savings include:
- Bundling car insurance with homeowners or renters insurance
- Raising insurance deductibles, which can lower your premiums
- Asking your auto insurer about safe driving discounts
- Raising your thermostat in summer and lowering it in winter to save on energy bills
- Dropping to a lower-tier cell phone plan or switching to a cheaper prepaid plan
- Canceling subscription services you don’t use
- Meal planning and cooking at home
- Consolidating errands so you spend less time driving (and save on gas)
- Learning basic home maintenance skills so you can handle minor repairs yourself
If you haven’t done so already, you can open a separate savings account for your emergency fund, and link it to your checking account. You can then schedule recurring automatic transfers from checking to savings.
Taking advantage of “free” or unexpected money is another way to build savings faster. You might add these windfalls to your savings:
- Tax refunds
- Stimulus payments
- Rebates
- Refunds for purchases
- Cash gifts received for birthdays or holidays
- Bonuses
You could also use cash back earned from credit card purchases to grow savings. But using a credit card to earn cash rewards makes sense only if you’re able to pay off the balance in full each month. Otherwise, the interest you pay could outweigh any rewards earned.
Finally, consider ways to earn more money to add to savings. Taking on more hours at work, getting a part-time job, selling items you no longer need, or starting a side hustle are all ways to make extra money that you can save.
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How Much Does the Average Indian Household Have in Savings?
Wondering how your savings balance compares to the typical Indian’s? The Reserve Bank of India stated that gross household financial savings increased by 13.9% year over year during 2022-23. However, net financial savings fell sharply to 5.1% of GDP in 2022-23 from 11.5% in 2020-21, well below the long-run annual average of 7.0-7.5%.
According to Statista, in India, the average annual saving of affluent households was over INR 3 million, starkly contrasting to the destitute category, which saved at most INR 5,000 in the financial year 2021.
Middle-class households save almost INR 1,30,000 annually. During the year, a wealthy household spends nearly 25 times that of an impoverished household, eight times that of an aspiring household, and almost three times that of a middle-class household.
Bottom Line
If you haven’t started building up savings, it’s time to move. Choosing the right place to keep your savings will allow you to earn maximum interest and pay minimum fees.
A high-yield savings account at an online bank is a secure place to keep savings while potentially earning a competitive rate on your money. Certificates of deposit (CDs) and money market accounts can also offer high yields with low fees.
As you work on saving, remember to review your goals and needs periodically. If your expenses increase or decrease, those changes can affect your savings goals. The more attention you pay to your finances, the easier it is to adjust your savings strategy so you won’t fall short in an emergency.
Frequently Asked Questions (FAQs)
How much should I have in savings for emergencies?
A common guideline for emergency savings is to set aside enough for three to six months’ expenses. But you might save nine to 12 months’ worth of expenses if you’re worried about a prolonged emergency draining your savings.
Can I have too much money in a savings account?
When deciding how much to keep in savings, the DICGC insures savers up to INR 5 lakh per depositor, per financial institution, for each account ownership type. If the balances across all your accounts at the same bank exceed your available coverage limit, some of your money may be uninsured if the bank fails.
Should I have more than one savings account?
It might make sense to open multiple savings accounts if you have more than one goal for which you’re saving. You might set up one account for emergencies, then open separate accounts for a car fund, vacation fund, or other savings goals.
How much should I keep in a current account?
Current accounts are designed to hold money that you plan to spend in the near term. Keeping one month’s worth of expenses in check can help you stay ahead on budgeting and bill payments. Maintaining a cushion can also help you avoid triggering expensive overdraft fees.
