How Much Money Should I Keep In My Checking Account?

You might think having as much money as possible in your checking account is ideal. However, unless you have a high-interest checking account that helps you earn interest on your account balance, too much cash in your checking account could mean leaving money on the table (more on this later).

Don’t get me wrong; it’s crucial to make sure you have enough money in your checking account. This will help you avoid overdrafts and, in some cases, monthly maintenance fees.

But how much money should you keep in your checking account? Keep reading as we explore this question further.

How Much Money Should I Keep In My Checking Account?

The ideal amount to keep in your checking account is enough to cover up to two months’ worth of expenses. Plus, if you want to be a little more conservative, you can include a 20% buffer to ensure you always have enough to cover your bills.

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However, it’s also important to consider the checking account you have. If your bank charges a fee when your account balance drops below a certain amount, you’ll also want to consider this.

How to Calculate Your Ideal Checking Account Balance

To calculate your ideal checking account balance, you need to understand your monthly expenses. Start by adding up all your monthly recurring payments. This includes rent or mortgage, insurance, loans, and credit card minimum payments. It should also include what you typically spend each month on groceries, eating out, and entertainment.

If you need help understanding your expenses, try using budgeting tools. Many of these will connect with your checking account and credit cards, automatically pulling in all of your transactions. You can then categorize them, and at the end of the month, you’ll have a better idea of exactly how much money you’ve spent.

How Much Money Should I Keep In My Savings Account?

Now that you better understand how much money you should keep in your checking account, it’s probably a good idea to also understand how much you should keep in your savings account.

Your savings account should be where you keep your emergency fund. This is the money you would rely on if you were to lose your job or have a significant unexpected expense pop up. It helps you avoid going into debt.

Your savings account should include at least three to six months’ worth of living expenses. This will give you enough of a financial buffer that you won’t feel the pinch if something happens. However, it also ensures that you don’t keep too much of your money in an account that doesn’t allow you to earn a return like the stock market might.

Best Places to Keep Your Extra Cash?

Once you know how much money you should keep in your checking account, you need to know where to put the rest. Keeping too much in your checking account can cause you to miss out on the opportunity to earn interest. Here are several options available.

High-Yield Savings Account

A high-yield savings account is one of the most common places to keep money you don’t need for living expenses. However, the savings account you choose can have a significant impact on how much interest you can earn. According to the Federal Deposit Insurance Corporation (FDIC), the average savings rate is 0.42%.

This low average is due to the significant number of brick-and-mortar banks that pay almost nothing on their savings account balances. Instead, you can choose an online bank, where some give you the opportunity to earn as much as 5%.

Certificate of Deposit (CD)

Another option is a Certificate of Deposit or CD. These products will offer interest rates similar to those of a high-yield savings account. Some of the best CD rates can offer up to 5%.

The rate you can earn from a CD will depend on the term you choose. CD terms can range from a few months to as much as 10 years. Even though the interest rates for CDs and online savings accounts are similar, there is one big difference between these two products. With a CD, your investment is locked up for the entire term. If you withdraw your funds before the CD matures, you could face early withdrawal penalties. The only exception to this is if you use a no-penalty CD. However, these usually have a lower interest rate.

Money Market Accounts (MMA)

Money market accounts (MMA) are similar to checking and savings accounts. You could think of them as more of a hybrid account. They’ll offer attractive interest rates like an online savings account, and they’ll give you check-writing abilities and a debit card like a checking account.

The biggest downside is that many MMAs require you to maintain a high account balance to earn the highest interest rates. You might also be restricted to the number of monthly withdrawals you can make.

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Investments

Everyone should keep a portion of their money in a checking account, their emergency fund in a savings account, and the rest in an account where real growth can happen.

While savings accounts help you earn interest on your money, they can sometimes lag behind inflation. We saw this over the past several years when inflation was high. When this happens, you’re losing money. This means it’s also important to have money in an investment account where you can hopefully earn a significant return. Something that’s well above what you might earn from a savings account.