It can be challenging to strike the right balance when it comes to saving money. Just as it's difficult to know when we're not saving enough, it's often equally tricky to recognize when we're over-saving.
Saving money and investing money serve distinct purposes. Putting money into a savings account is essentially a form of insurance - it provides a buffer for known future expenses, unexpected emergencies, and periods of job loss. While it's risky to save too little for these contingencies, having too much in savings can also be detrimental to your overall investment strategy.
The key is to find the sweet spot where your savings account provides the necessary financial cushion, without tying up too much of your wealth in low-yielding cash. Here are some tips to help identify savings shortfalls and excesses:
Evaluate your emergency fund: Experts typically recommend keeping 3-6 months' worth of living expenses in an easily accessible savings account. If your emergency fund is significantly below or above this range, it may be time to adjust.
Track your known future expenses: Make a list of all the big-ticket items you'll need to save for in the coming years, such as a down payment on a home, a vehicle replacement, or your child's education. Ensure you're allocating appropriate amounts to dedicated savings accounts for these goals.
Calculate your savings rate: Your savings rate is the percentage of your income that goes into savings each month. Financial planners often recommend targeting a savings rate of 10-15% or more. If your rate is consistently much lower or higher, it may be time to reassess.
Consider your investment portfolio: If you find you have a large cash balance that isn't earmarked for a specific purpose, that money is likely better suited for investment opportunities that can provide higher long-term returns.
Striking the right balance between saving and investing is an ongoing process that requires regular review of your financial situation. By staying mindful of savings levels and aligning them with their short- and long-term goals, we help our clients optimize their money management and set them up for financial success.
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