Most of us keep a large portion of our income in a savings account. We often assume that keeping money in a bank account is the safest option. But did you know that keeping too much money in a savings account may not always be financially beneficial?
A common question among people is: How much money should you actually keep in your savings account, and when should you use it? Here is what personal finance rules suggest.
Why Is a Savings Account Important?
A savings account is an important part of financial planning because it provides easy access to your money whenever you need it.
One of its biggest advantages is liquidity, which means you can withdraw your money whenever required. It also provides a relatively safe place to keep funds while earning some interest.
A savings account is commonly used for receiving salaries, paying bills and managing regular day-to-day expenses.
How Much Money Should You Keep in a Savings Account?
According to the financial planning approach mentioned here, you should generally keep around one to two months’ worth of expenses, along with a small additional buffer, in your savings account.
The remaining money can be considered for savings and investments based on your financial goals and risk profile.
What Is the 50/30/20 Budgeting Rule?
The 50/30/20 rule is a commonly used budgeting framework for managing income:
- 50% – Needs: Rent, EMIs, groceries, electricity bills, insurance, education and other essential expenses.
- 30% – Wants: Travel, eating out, shopping, entertainment and other lifestyle expenses.
- 20% – Savings and Investments: Emergency funds, mutual funds, fixed deposits and investments for future financial goals.
Why Should You Avoid Keeping Excess Money in a Savings Account?
Keeping significantly more money than required in a savings account may have some disadvantages.
Inflation Can Reduce Your Money’s Value
Savings account interest rates may not always beat inflation. As prices rise, the purchasing power of money that remains in a low-interest account can gradually decline.
You May Miss Better Investment Opportunities
Money that remains idle in a low-interest savings account could potentially be used for other financial goals, such as fixed deposits, mutual funds or other investments, depending on your risk tolerance and financial requirements.
When Should You Use Money From Your Savings Account?
Money kept in a savings account should primarily be available for emergencies and short-term expenses.
When You May Need It
- If you suddenly lose your job
- During a medical emergency
- For an urgent home or vehicle repair
- For other unexpected essential expenses
When You Should Avoid Using It
You should avoid using emergency savings for unnecessary lifestyle expenses such as buying a new phone, partying or taking an unplanned vacation.
Similarly, money meant for long-term financial goals may need to be invested appropriately rather than left entirely in a savings account.
The Bottom Line
Keeping around one to two months of expenses plus a small buffer in a savings account can help maintain liquidity for regular and emergency needs. The remaining money can be allocated toward suitable savings and investment options according to your financial goals.
The key is not simply to keep all your money in a bank account, but to manage it in a way that balances liquidity, safety and long-term financial growth.
Bhudev Bhagaliya is an experienced and senior journalist who has carved a distinct niche for himself in the world of Hindi journalism through his profound understanding and precise writing style. With over two decades of experience in the field of journalism, he has held key responsibilities at Dainik Hindustan for 12 years and at Amar Ujala for one year. Currently, he serves as the Content Editor for the Jagrook Youth News newspaper and portal, where he plays a crucial role in ensuring the quality and credibility of the news content. Bhudev Bhagaliya consistently writes about issues that help raise awareness within society and among the younger generation.