In modern personal finance, managing and adjusting the amount of deposits in bank accounts is a crucial issue. Some believe that the more funds available in bank deposits, the better, but the reality may not be so simple.
Undoubtedly, bank deposits are an essential part of ensuring financial security for ourselves and our families in modern life. When it comes to personal finance, a common question that plagues many people is: how much deposit should one keep in the bank while investing in areas like the stock market, real estate, or bonds? Or, in other words, what amount of deposit would be considered “enough” or “too much”?
To find a suitable balance between investment and bank deposits, it is important to first understand and clarify the core purpose of bank deposits. In other words, what is the purpose of holding onto these bank deposits after investing a portion of funds.
In essence, the deposits in a bank account are meant to provide financial security and the flexibility to access funds. Whether it’s to handle emergency expenses, cover daily expenses, or prepare for a specific financial goal, cash reserves are indispensable. This is because during times of urgent need for money, many investments cannot be liquidated quickly, and investments may also fail, resulting in losses, sometimes even leading to financial ruin.
So, how much deposit should be kept in a bank account? To a large extent, the answer to this question depends on an individual’s financial situation, lifestyle, and goals. For example, the definition of “having enough deposit” varies clearly between a single working professional without children and a homemaker with three kids.
According to personal finance expert Rachel Cruze’s research, everyone should have an emergency fund, typically covering 3 to 6 months of living expenses. This money can be used to deal with unforeseen events such as job loss, medical emergencies, or sudden vehicle repairs.
Taking an average American’s lifestyle as an example, if someone’s monthly living expenses amount to $3,000, then the ideal range for an emergency fund would be between $9,000 and $18,000. However, this number is not set in stone. For those with unstable incomes (like freelancers), it may be necessary to set aside 12 months’ worth of living expenses, while dual-income households may find 3 months’ worth sufficient.
Having too little in bank deposits can pose significant financial risks. Assume someone only has $500 in their bank account and suddenly needs to pay a $2,000 car repair bill. They may have to rely on credit cards or high-interest loans, leading to debt accumulation. This situation not only increases economic pressure but can also harm long-term financial health.
Conversely, having too much in bank deposits also presents issues. If someone has $500,000 sitting idle in a regular savings account with an annual interest rate of only 0.5%, they would earn a mere $2,500 in interest over a year. In cases where inflation rates exceed interest rates, the value of this fund would actually diminish continuously. In other words, leaving excessive cash in low-yield bank accounts could mean missing out on various investment opportunities like the stock market, real estate, or bonds, which could potentially yield higher returns.
Regarding how to choose specifically, let’s take an example. Assuming monthly expenses amount to $2,000, one could set aside $6,000 to $12,000 in a bank emergency fund, add a $5,000 travel budget for the year, totaling $11,000 to $17,000 in deposits. The excess funds could then be considered for investments, combating inflation and achieving wealth growth.
The example showcases that there is no definitive answer to how much is considered “too much” or “too little” in bank deposits. The “appropriate amount” of bank deposits is not a fixed figure but varies from person to person. An individual’s income, expenses, goals, and risk tolerance collectively determine this balance.
By appropriately allocating emergency fund deposits, short-term goal funds, and investment portfolios, we can secure our own and our family’s financial well-being while making money work for us, earning more profits, known as “making money work for you”. Nevertheless, a moderate amount of bank deposits not only brings peace of mind but also opens up more possibilities for the future and is absolutely indispensable.