How much money should you keep in the bank?

Invest MoneyBy Eamon

Depending how experienced you are with money management, one may think the aim of the game is to fill your bank account sky high. But that’s far from the truth. When we reveal how much money you should keep in the bank it’s going to be both a relief and a shock.

How much to keep in the bank at all times

The answer to this question could differ based on location. We’ve cherrypicked leading UK personal finance experts to help fellow Brits but it’s still worth consideration if you’re further abroad.

MoneySavingExpert founder, Martin Lewis, recommends keeping up to 6 months worth of living expenses aside as an emergency fund. If that’s too much, 3 months would suffice but it will be hard on you should you need it.

Emergency funds are a critical safety net and the main reason everyone should continue saving in banks. Major expenses can come out of nowhere such as boiler and roof replacements at £2500 and up to £12,000 respectively. Also, if you were breaking even on your cashflow last year, 9.1% inflation and price surges for large bills such as gas, electricity and fuel will have caused you to be underwater. You need funds to save costs or make more money while you adjust. More so, economic downturns like we’re seeing currently can lead to significant job cuts. Depending on your profession and experience, finding new work could take anywhere from a few weeks to several months. Realistically, if your industry is stable and your skills are in demand, you may be able to get away with one to two months worth of bills.

But why such a low amount? Aren’t banks there for storing money? These are great questions, so…

Where does the rest go?

The Money Mind exists to help you build wealth so this only applies to people looking to get richer. Generally speaking, banks offer incredibly low interest rates on your savings. You could get around 1.5% savings interest in a standard current account and 2.5% in a fixed account. One such problem with this is that the Inflation Rate in the United Kingdom has averaged 2.56 percent from 1989 until 2022. So, you’re effectively losing money because the financial gain you keep in your bank account is less than the increase in the price of goods and services.

Purchasing power of one British pound sterling (GBP) from 1209 to 2019

As shown in this Statista graph, the pound gets weaker by the year as we continue to lose global power. But UK assets are still valuable as they grow with, and sometimes faster than, inflation.

For example, in 1980, the average house value was just over £23,287 and by 1983 the average price had risen to £27,623 according to Nationwide. If you had £30,000 40 years ago and kept it in the bank at 1.5% interest, you would only have around £54,420 today. But according to the official government index the average UK house price is now £278,000 (March 2022). In other words, if you had bought a house in the 1980’s you would be a lot richer right now.

If you learn how to invest, you can keep less in the bank and put more into assets that appreciate at a much higher rate. Many millionaires don’t actually have much money to hand out even though they have a high net worth. They put their money into a diverse portfolio of stable investments that will grow such as bonds, mutual funds, stocks and retirement accounts.

How much is too much in savings?

While it’s good to keep emergency funds in the bank, they don’t represent the entirety of your savings. You may want to save more for a variety of reasons. A few that spring to mind include regular pension deposits, a downpayment on a property, weddings, or separate funds for ‘fun money’ to help with budgeting. In that sense, your savings can be much higher than the base amount that stays in your bank account. But if you have more than £100,000 at one time, consider moving it to a safe place with better interest ASAP to avoid losing several thousand pounds worth of extra income.