Advertisment

How Much Money Should You Save in Your Bank Account?

No one should measure someone else's worth by the size of their bank accounts.

This could mean figuratively that anyone’s worth is not measured by his wealth. I certainly understand that sentiment. Wealth cannot be a yardstick of how good a person is. Or should it be used to tell if you and me can contribute or not.

I believe anyone’s value to everybody else shouldn’t be just about the amount they possess. After all, the people who we have looked up to for their enormous contribution to humanity have not always been the richest. Quite of few of them actually didn’t do well financially.

Money Talk

I don’t intend this statement to mean figuratively, however. I’m saying this in the most literal sense. This is, after all, a personal finance discussion. And even if we’re not going to spend all our energy to creating wealth, we should be wise enough to know how money works.

It would be to our great advantage if we could do what we love to do and not worry too much about money. In other words, we all aim to be financially independent so that we can pursue our passions and live a meaningful life. That objective is quite distinct from setting our focus only on wealth accumulation just for the sake of being rich.

So Why is That?

Why shouldn’t we measure our worth by the size of our bank accounts? The answer to that is pretty simple. It’s because we shouldn’t be letting most of our money sit in bank accounts in the first place. Not all of it, anyway. From a personal finance standpoint, large money in banks has disadvantages that rob us of earning opportunities.

Sure money in the bank has important uses. That’s why it is still necessary to have some amount in the bank. But make no mistake, bank deposits should exist mainly for the following reasons:

1. Liquidity - We all have a need for cash. Whether it is for paying our bills, buying groceries, spending on fuel, etc., having readily available cash in the bank is a necessity that we just can’t live without. This need for liquidity, however, does not mean a significant amount be maintained in deposit accounts.

2. Business transactions - If you’re employed, your salary probably goes straight to your bank account. Banks also provide necessary services that business owners need. If you sell some goods or services, banks can be tapped as the payment receiving partner. Many bill payments can now be made online through banks. In order to avail of these benefits, one only has to have a bank account. Not necessarily one full of cash.

When these needs are met, those extra cash you have should be somewhere else other than a bank. The reason is simple. Deposit accounts in banks pay too little interest rates. So if you're maintaining a big amount in your deposit account for a long period of time, your money is not doing you any good.

Instead of letting your cash lose its value to inflation, you should consider investing it. There is a wide array of options to choose from if you decide to invest. I've written about them here.

Money in the Bank

This brings me back to the original question. If it's not wise to put a lot of your cash in your bank accounts, how much should be left in there?

My direct answer to that would be to leave no more than six months’ worth of expenses in your deposit accounts. This is the maximum in my opinion. It could be less than that depending on your strategy.

Why six months? As a proven rule-of-thumb, six months’ worth of expenses is a good enough emergency fund. In cases when you need immediate cash due to events that are unforeseen, availability of funds is important. That's why your savings account may serve as an appropriate parking spot for your emergency fund due to its liquidity.

Less is Good

I also say this is the maximum because you can actually trim this even further. If you can find an investment vehicle with good enough liquidity and a better return than savings account, then you may opt to place your emergency fund in there. (This actually exists and I have written about such investments here.) This will mean that your bank deposit will just handle your immediate need for cash. I believe this could be brought down to as low as two months’ worth of expenses.

As a final note, if you've been worrying about how low the deposit insurance coverage is by the PDIC (Philippine Deposit Insurance Corporation), which is P500,000, then you obviously have not learned the lessons in this article. Your money will not grow in your savings accounts so why keep it there?