Did you know that there is such a thing as too much savings? It’s true! Some people over save in their emergency fund. Or even in retirement accounts. Not everyone is the chronic over-spender the media would have you believe.
There should be a balance to saving for the future and enjoying your life today. But how do you know when you have satisfied one savings goal and can move onto the next?
First, let’s address the all important emergency fund. This is your first line of defense against job loss or other unexpected expenses. Without an adequate emergency fund, the slightest ripple in your usual expenditures can lead you to credit card debt or incurring hefty taxes for taking money out of retirement accounts early.
As important as an emergency fund is, it shouldn’t be an ever-ballooning account. Here is a guideline for how much to target for your emergency fund.
| Your Household | Income Source | Target Emergency Fund | Target $ Amount
$6,000/month household expenses |
| Single or One Breadwinner | Steady job, low chance of layoff | 4-6 months expenses | $24,000 –
$36,000 |
| Married or Two Breadwinners | Steady jobs, low chance of layoff | 3 months expenses | $18,000 |
| Single or One Breadwinner | Small business owner
Uncertain earnings Commission based income Frequent job changes |
9-12 months expenses | $54,000 –
$72,000 |
| Married or Two Breadwinners | Small business owner
Uncertain earnings Commission based income Frequent job changes |
6-9 months expenses | $36,000 –
$54,000 |
After you have hit your emergency fund goal, turn your attention to building up retirement savings or a non-retirement investment account.
As for how much is too much in retirement accounts? This is a more personalized calculation. Talk to your financial advisor (or me, if you don’t have one yet) to determine if you are on track for your desired retirement lifestyle.
I have told people they are over-saving for retirement and could be spending more today and saving less for the future. It’s not unheard of and gives people permission to enjoy the fruits of their labor today and not wait until they are over 60.
Next week will be the conclusion of the financial basics series. Then I will shift into blogs about complex options trading strategies. Just kidding!
