How much money should I keep in my checking account?
A checking account is the financial command center for many Americans. Most receive their paychecks and pay bills from their checking accounts and use them on a near-daily basis. Knowing exactly how much money to keep in your checking account is crucial for optimal money management. Having too little in the account leaves you open to overdraft fees. On the other hand, having too much cash in your checking account can be inefficient and may expose you to missed financial opportunities. Identifying the right balance is essential. This guide shares how much money you should have in your checking account and how to optimize wealth creation opportunities.
How much should you keep in your checking account?
Determining how much you should keep in checking is not necessarily a one-size-fits-all situation. You want to keep enough money in your account to cover your expenses adequately and have some buffer, but not so much that you leave that much money sitting idle when it could be earning more elsewhere. That amount will vary, based on your particular needs, but there are certain principles to keep in mind.
It’s important to keep your checking account well-padded to cover unexpected expenses and avoid overdraft risks.
Setting a monthly budget can help you determine the right amount to keep in your checking account and ensure you stay within your financial limits.
A good rule of thumb is to keep one to two months’ worth of living expenses plus a 30% buffer in your checking account. Having this buffer, along with overdraft protection, can help prevent costly bank fees and provide peace of mind.
Why one to two months of expenses is ideal
Most financial experts recommend keeping one to two months’ worth of living expenses in your checking account. This allows you to cover recurring bills and manage any minor needs that may arise between paychecks. Keeping this amount also increases the likelihood you’ll be able to avoid bank fees.
When calculating how much to keep in your checking account, track your monthly expenses, including rent or mortgage payments, utilities, groceries, and other regular monthly bills you pay. For example, if your regular expenses total $4,000 monthly, you should aim to keep at least $4,000 to $8,000 in your checking account. The key here is to have a range of cash that’s accessible and efficient enough to manage most expenses.
The role of a 30% buffer
If there’s one thing that’s true about life, it’s that there’s little certainty. Having a buffer in your checking account is a good way to protect yourself from overdrawing your account and incurring a fee. Bank fees can easily erode your account balance, with the average overdraft fee being nearly $31 per occurrence.
Adding a 30% cushion helps stave off overdraft fees. Having such a cushion can provide peace of mind if you have a large pre-authorization hold or if you’re a gig worker with an unpredictable pay schedule. Moreover, if a paycheck is late from your employer, the buffer can help maintain liquidity without needing to dip into your emergency savings.
How much is too much or too little?
Seeing a large checking account balance may feel good, but keeping too much money or having an overstuffed checking account can be inefficient. Having more cash in your checking account than necessary means you miss out on potential earnings from interest or investments, and it can hinder goal achievement in the long run. Excess funds can be better used by earning a more competitive interest rate or growing more in a brokerage account.
Additionally, excessive funds in a checking account can increase losses if your debit card is compromised, posing a security risk.
If you consistently keep over three months’ worth of living expenses, you may want to consider moving some of your funds to another account option, such as a high-yield savings account, for better returns.
Alternatively, there’s risk in keeping too little in your checking account. You expose yourself to needless fees that can erode long-term wealth. And, you may make the bank happy with your actions. Americans paid over $5.8 billion in overdraft/NSF fees in 2023, according to the Consumer Financial Protection Bureau (CFPB). If possible, it’s best to keep enough in your checking account to avoid incurring fees.
How to calculate the right amount for you
If you’re trying to determine ‘how much should I have in my checking account?’ there’s no set ideal number for every individual. The average checking account balance, for people in the 20-39% percentile of income, is $16,140, although the median balance is a more modest $2,550, according to Yahoo Finance.
For most people, it’s wise to hold one to two months’ worth of living expenses in your checking account. Your optimal amount depends on your lifestyle, income, expenses, and comfort level.
Identifying your number requires sufficiently knowing your monthly expenses, variable costs you might incur from month to month, and the reliability of your income.
Track your monthly expenses
Tracking your spending is a hallmark ideal in personal finance. Done right, tracking spending helps you avoid debt and unnecessary expenses. It’s also helpful when trying to calculate how much to keep in checking.
Track everything you spend for two or three months, regardless of whether it’s on your credit card, a debit card transaction, an ATM withdrawal, or a check. Add in all of your known expenses, like housing costs and utilities, to get a better idea of your responsibilities each month.
After tracking for several months, you will have an average of what you spend each month. Use this number as a base for what to keep in your checking account. For example, if you spend $3,000 monthly, you want to have $3,000 to $6,000, at a minimum, in your account.
Account for fixed and variable costs
Fixed expenses are predictable. You know what you’re going to spend on your mortgage/rent, insurance, utility bills, and other regular bill payments each month. Everyday expenses, such as groceries, gas, and other daily spending, are variable costs that may change each month.
Gas, dining out, shopping, and more can fluctuate, and you want to account for that. You may also want to consider seasonal fluctuations, such as higher heating bills in the winter, that may see spikes in expenditures.
In addition to regular spending, it’s important to account for larger expenses and upcoming bill payments when determining your checking account balance.
Having a good understanding of variable costs can help you identify a reasonable amount to keep in your checking account to avoid nasty fees.
Maintaining a minimum balance in your checking account can also help you avoid monthly maintenance fees, as some checking accounts may charge a fee if you don’t maintain the required minimum balance.
Adjust based on income stability
Income stability plays a significant role in calculating how much you should have in your checking account. If you’re paid on a regular, predictable schedule, you may be fine sticking to the lower end of the one to two months’ worth of living expenses.
However, if you work on commission, are self-employed, or have an irregular income, it’s important to ensure you have enough money and additional cash in your checking account. This helps cover daily expenses and provides a buffer for unexpected costs. In these cases, it’s prudent to aim for up to three months’ worth of living expenses.
If your income is irregular or freelance-based, it is advisable to maintain a higher balance in your checking account to manage fluctuations.
What to do with extra cash beyond your checking needs
Identifying what to do with extra money or more cash than needed in your checking account is a powerful way to put liquid funds to better use. If you find yourself with surplus funds, consider moving these liquid funds to accounts that support long-term savings, such as high-yield savings accounts or investment accounts. Checking accounts traditionally pay minimal interest, if any, so putting extra money to work for your long-term savings goals is wise.
Move funds to a high-yield savings account
High-yield savings accounts are a good option for unused funds because you can earn interest on your savings by moving funds from your checking account. These accounts often outperform the national average for savings account interest rates. Competitive banks are currently paying at least 3%, if not over 4% on balances, in most cases. The best high-yield savings accounts are commonly found via online banks, which offer the same FDIC protections your local bank offers.
It’s important to choose an FDIC-insured bank for your savings to ensure your deposits are protected up to $250,000 in case of bank failure.
You can stash excess cash from your checking account in a savings account to grow your emergency fund. Many online banks have little to no fees and offer liquidity, often allowing you to get cash into your checking account within one business day.
Use CDs for short-term goals
Do you have a fully-funded emergency fund and don’t require liquidity on all of your leftover funds? Parking extra cash in a CD can be a good option, especially if you won’t need immediate access to the money. Moving the same funds into CDs can help you maximize returns while keeping your money safe.
CDs let you lock in a competitive interest rate with minimal risk. Just make sure you won’t need access to the money before maturity. If you do, you may pay early withdrawal penalties or sacrifice interest. FDIC insurance limits apply per ownership category, so it’s important to consider this when managing multiple accounts.
Grow your investments
For those in the enviable position of not needing access to spare money and with fully-funded emergency savings, investing additional cash is a fantastic choice to help you build long-term savings. You can stash the excess funds in your 401(k) or IRA to save for retirement.
If your retirement planning is on track, consider putting the funds in an online brokerage account to grow the funds. This latter choice isn’t tax advantaged, but it does offer a better ability to create wealth versus keeping funds in a savings account.
Risk of mismanaging your checking account balance
Misallocating funds in your checking account can be a costly mistake. Maintaining a minimum balance is important to avoid fees, such as monthly maintenance fees, which can quickly add up and reduce your available funds. Finding the right balance is essential to wise money management.
Having too much cash in your checking account can be inefficient, as it may limit your potential for earning interest or growing your savings elsewhere. It’s advisable to have both checking and savings accounts for managing daily expenses and building an emergency fund.
Overdraft fees and bounced payments
Keeping too little in your checking account can quickly become expensive. The average overdraft fee is over $30 per occurrence, and without a financial buffer, you risk overdrawing your account. Maintaining a buffer and setting up overdraft protection can help you avoid overdrafts and the associated fees. It’s also possible that your bank may charge multiple fees if multiple transactions are authorized.
Worse yet, returned payments can potentially impact credit, depending on the vendor. Establishing low-balance alerts in your bank app is a good way to help prevent such situations.
Missing out on interest savings
Logging into your bank account and seeing a healthy checking account balance feels good. However, keeping too much money in your checking account, also known as having an overstuffed checking account, can actually cost you. When you let excess funds sit in a checking account, you miss the opportunity to earn interest by moving that money into a high-yield savings account or other interest-earning options.
For example, if you have an extra $10,000 sitting in your checking account, earning 0.01%, that shouldn’t be there; instead of earning 4% in a high-yield savings account, you’re sacrificing $400 in interest annually. If done long-term, that interest amount can add up, needlessly leaving more money on the table.
FDIC insurance limits and security concerns
Keeping too much in any bank account exposes you to certain risks. FDIC coverage is one notable consideration as insurance protects up to $250,000 per depositor, per bank. If you exceed that amount, those funds aren’t insured.
Furthermore, if your bank is compromised or fraud occurs, you can be at increased risk if you have too much in your account.
Bottom line
Calculating how much you should have in your checking account is vital to wise money management. You want to balance proper liquidity with opportunities to maximize growing your spare funds. Keeping up to two months’ worth of living expenses plus a small buffer is a good first step to achieve this balance. Regularly monitoring your checking account is a good way to find the right balance between staying liquid, avoiding bank fees, and creating wealth.
