How Much Money Should You Keep in Your Checking Account?
A checking account can help you cover your bills and manage your everyday expenses. If you have one, you might wonder how much money to keep in it.
The goal is to ensure you have enough funds to cover your day-to-day bills but not too much that you miss out on potential higher returns elsewhere. Below, we’ll dive deeper into how much money you should keep in your checking account.
Expert Advice on How Much Money to Keep in Your Checking Account
Most experts recommend keeping a few months’ worth of expenses in your checking account.
“I recommend keeping just enough in your checking account to cover the monthly expenses. If you create a budget and/or route all of your expenses through a single checking account, this can be an easy way to know approximately how much you should have in there every month,” says Chris Urban, Certified Financial Planner and Founder of Discovery Wealth Planning.
If you feel more comfortable with an additional safety net, you may want to keep 30% more than your total monthly expenses.
“Consider routing a bit more than this from your paycheck(s) to this account and then routing any additional funds you are able to save into other types of accounts, such as retirement and investment accounts,” adds Urban.
Let’s say your monthly bills add up to $4,000. In this case, you should aim to keep anywhere between $4,000 and $9,000 in your checking account. The exact amount will depend on factors like your particular expenses, lifestyle, comfort level, and income.
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Why Only Keep a Few Months of Expenses in Your Checking Account
While you might want to keep a lot of money in your checking account, one to two months of expenses is usually ideal. This amount can help you do the following:
Avoid Overdraft Fees
Most banks charge overdraft fees if you spend more money than you have in your account. With a few months’ worth of expenses in your checking account, you can reduce your risk of overdraft fees, which can be anywhere from $10 to $40, depending on the financial institution.
Ensure Security for Preauthorizations
Preauthorizations place holds on your account for some transactions, like rental car purchases, for example. They’re designed to make sure you have enough funds to cover them. A buffer in your checking account can help you prevent declined transactions.
Complete Everyday Purchases
With sufficient funds in your checking account, you’ll be able to cover day-to-day expenses, like gas and groceries, with your debit card and checking account. You won’t have to worry about constantly transferring funds between accounts.
Pros & Cons of Leaving All Your Money in Your Checking Account
Pros
- Immediate Access to Funds: Checking accounts offer easy access to your money, whether through debit cards, checks, or ATMs. This makes it convenient for everyday expenses and emergencies.
- No Withdrawal Limits: Unlike savings accounts, which may have withdrawal limits, checking accounts typically allow unlimited transactions, making them ideal for frequent use.
- Avoid Fees on Transactions: Since checking accounts are meant for regular transactions, you’re less likely to incur fees for excessive withdrawals, as might happen with savings accounts.
- Direct Deposits and Bill Pay: Checking accounts are often the default for receiving direct deposits and setting up automatic bill payments, ensuring your financial obligations are met efficiently.
- No Investment Risk: In the U.S., the FDIC insures checking account funds up to a certain limit, meaning they’re protected even if the bank fails.
Cons
- Low or No Interest: Checking accounts typically offer little to no interest, so your money isn’t growing like it could in a savings account, investment, or other higher-yield account.
- Inflation Risk: Over time, inflation can erode the purchasing power of money sitting in a checking account. Without interest gains, your savings may lose value in real terms.
- Higher Spending Temptation: Since checking accounts offer easy access to funds, there’s a higher risk of overspending. Without barriers like withdrawal penalties, you may dip into your savings unnecessarily.
- Lack of Diversification: Keeping all your money in one place limits diversification. Spreading funds across different types of accounts (savings, investments) allows for potential growth and risk management.
- Potential for Fees: Some checking accounts come with monthly maintenance fees, overdraft fees, or other charges if certain conditions (like maintaining a minimum balance) are not met.
Why You Shouldn’t Keep All Your Money in a Checking Account
It may be tempting to store all your cash in your checking account so that’s all in one place and easy to track. However, doing so is not a wise financial decision. Here’s why:
Low Interest Rates
Some checking accounts pay interest but the rates are typically less than what you’d earn in another account, like a savings or money market account.
“Over time, holding too much in a low-interest checking account can erode purchasing power due to inflation,” says Taylor Kovar, Certified Financial Planner and Founder at PhysicianFinancialPlanning.com.
Risk of Theft
When you park all your money in your checking account, you make it easier for a thief to access it. If your debit card gets lost or stolen, anyone can make unauthorized withdrawals or purchases with it.
Limits on Transfers
Most banks impose transfer limits on savings accounts. These are typically six transactions per month, which might not be enough if you need to cover your bills or make daily debit card purchases.
Difficulty with Savings Tracking
When you have all your money in a checking account, it can be challenging to determine how much is for everyday spending and how much you have to allocate to emergencies and other savings goals.
Where to Store Your Extra Cash
Once you have a few months of expenses in your checking account plus a buffer if you’d like, you may want to hold the rest of your money in these accounts.
High-yield Savings Account
Compared to a traditional savings account, a high-yield savings account offers higher interest rates.
“High-yield savings accounts are ideal for funds you want to keep accessible but earn a higher interest rate than traditional checking accounts. Suitable for an emergency fund or short-term savings goals,” explains Kovar. Be sure to shop around to find the best account and highest rate for your unique situation.
Certificate of Deposit (CD)
If you like the idea of predictable returns, a CD should be on your radar.
“Certificates of deposit (CDs) are useful for funds that you can lock away for a set period to earn a fixed interest rate. Good for medium-term savings goals where liquidity is less of a concern,” notes Kovar.
Most CDs come with terms ranging from three months to five years.
Money Market Accounts
With a money market account, you can enjoy the benefits of both a checking and savings account. If you think you’ll maintain a large balance and hope to earn an attractive interest rate but also want to be able to pay bills with a debit card or write checks, it may make sense.
Note that many banks require you to keep at least $10,000 in a money market account to earn the highest rates.
401(k) and IRA Accounts
401(k) and IRA accounts are worthwhile if you plan to retire one day. “These retirement accounts are essential for long-term retirement savings. Contributions often provide tax advantages and compound growth over time,” says Kovar.
Even if retirement is years or decades away, a 401(k) or IRA can allow you to take advantage of compound interest and grow your wealth.
529 Accounts
If you’d like to save for college, 529 accounts are a solid choice. They’re tax-advantaged accounts you can use to cover tuition, room and board, books, and other qualifying educational expenses.
Keep in mind that maximum contribution limits vary by state, so it’s important to do your research and find out how much you can add to a 529 each year.
Bottom Line
At the end of the day, it’s up to you how much you keep in your checking account. However, if you stick to a few months of expenses and spread the rest of your money out across various other accounts, you’ll be able to set yourself up for financial success today, tomorrow, and years down the road.
