There is no question that you need short term savings. The next logical question is exactly how much you need to have in your short-term savings accounts. The answer varies by the individual.

Your Age and Family Situation
Your age and family is a large factor in your savings plan. Young, single individuals need considerably less than families of four sending children off to college. Short term savings should cover three to six months worth of living expenses as well as any planned major expenses in the next three to seven years.

A young, single individual with bills of $1200 a month who just graduated from school with a new car gifted to her by her parents can save $3600 and be fine – at least until she gets married, decides to buy a condo, plans a month long vacation to Europe or any number of other planned expenses. As situations change, your savings plan changes as well, so always be reassessing your needs.

By contrast, a married couple about to send their child away to college and looking at a career in a declining industry after decades of hard work need a full six months of living expenses in short term savings as well as the cost of college tuition. There is a greater likelihood of losing a job, and despite years of experience, it may take longer to find a new one. If the couple lives in an aging house, they must also be saving for major improvements such as a new roof or foundation work.

Risk Tolerance
Your age also determines the best way to invest your entire portfolio. The older you are, the more you should have in liquid assets. The stock market is inherently more risky than CDs or money market accounts. Money invested in stocks can grow at a much faster rate than money in liquid assets, but that same growth can spiral down in a moment and take years to recover.

The older you are, the more money you need invested in your short-term savings accounts to protect yourself from the fluctuating stock market. Young people need less in liquid assets for short term savings as they can afford to take a long view of the stock market. It may be that a young person or couple has only three months worth of expenses in short-term savings with the remainder of their savings in stocks. An individual approaching retirement needs six or seven months of living expenses and planned expenditures in short term savings for adequate protection.

Basic Needs
At the most basic level, the amount you need in short term savings is tied directly to how much you spend every month. Your short term savings account should contain three to six months worth of living expenses. If your living expenses are $2000 a month, your short-term savings needs to contain $6,000-$12,000 at the minimum.

These savings are designed to cover your household expenses should you lose your job or encounter a situation where you are unable to work for a short time. Your account must also include funds to protect you from other, smaller emergencies such as car repairs, emergency home maintenance and medical emergencies. Remember that the more dependents you have, the more likely you’ll encounter an expensive emergency.

Planned Expenses
Finally, your short-term savings needs to include any planned expenses you foresee in the next three to seven years. New cars, new homes, travel, and college tuition all can fall under planned expenses. And with the continual addition of new trips, procedures and large ticket items to a household, the need for planned expenses is ever changing. Be sure to review your savings plans periodically to ensure you are saving adequately for the future.

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