How Much Should You Keep in Checking and Savings?

How Much Should You Keep in Your Checking Account?

Experts often recommend stashing enough cash to cover one or two months of living expenses, plus an additional 30% to cushion your account. Ideally, this strategy covers all of your transactions plus extra money for unexpected expenses or income fluctuations.

Consider the following steps to help you determine your ideal checking account balance:

1. Mind your minimums. Your checking account should never drop below your required minimum balance, if you have one. An insufficient balance will likely trigger a hefty overdraft fee.
2. Calculate your expenses. Track your expenses over a few months to determine your average monthly outflow.
3. Determine your optimal balance. Once you've calculated your average monthly expenses, you can choose whether to add enough funds to cover one or two months plus a 30% buffer. Consider aiming on the high side if you're self-employed or have income that varies.

Remember, your checking account is simply an operational account for everyday spending, ATM withdrawals and bill payments. There are risks to having too much or too little in your account, so it's vital to strike the right balance.

Risks of Keeping Too Much in Checking

Keeping enough money in your checking account is necessary to avoid overdraft fees, but stashing too much money could mean you're leaving cash on the table. That's because many checking accounts don't offer an annual percentage yield (APY), meaning any extra money you leave in your checking account isn't earning interest.

Of the checking accounts that do offer yields, they typically come with paltry rates. The average rate for interest-yielding checking accounts is only 0.07%, according to Federal Deposit Insurance Corp. (FDIC) data.

However, due to the Federal Reserve's interest rate hikes over 2022 and 2023, high-yield savings accounts (HYSAs), certificates of deposit (CDs) and other savings options are earning elevated rates. For example, many financial institutions currently offer rates over 4% and 5% for HYSAs and CDs. Moving some of your extra money into these accounts could ensure you're not missing out on the opportunity to earn interest.

Also, a high checking account balance could make it easier to overspend, which limits the funds you can direct toward your savings goals. This is where a strategic budget can come in handy to help ensure you split your funds appropriately between your checking and savings accounts.

Risks of Keeping Too Little in Checking

The most immediate risk of underfunding your checking account is the overdraft fees you may accumulate if you overdraw your account. The average fee for insufficient funds is $34, so having a good cushion in your account can save you money and aggravation. Backup funds can also alleviate anxiety: An unusually large utility bill or small emergency expense is unlikely to cause a cascade of overdrafts.

Additionally, maintaining a near-zero balance can leave you scurrying to cover your bases if you suddenly face an unexpected expense. Ultimately, it pays to be strategic about how much money you stash in your checking account to ensure a balance of financial safety, potential growth and peace of mind.

Even with a few months of expenses in the bank, it's essential to check your account regularly to make sure you're maintaining your intended balance. You also want to monitor your account for fraudulent transactions.

How Much Should You Keep in Your Savings Account?

The amount of money you should park in your savings accounts may depend on your budget and financial goals.

Ideally, you want an additional three to six months' worth of expenses set aside as an emergency fund. Consider setting aside a specific amount from every paycheck and having it deposited directly into your savings account. Alternatively, check to see if your financial institution has an automatic savings option that will sweep money from your checking to savings on a regular basis.

You may also want to use separate savings, sometimes called a sinking fund, to accumulate money for big-ticket items such as a down payment on a home, a vacation or a new car. Determining how much you should save in this account will depend on the cost of your goal and your time horizon.

For example, the cost of a U.S. vacation is $1,550 per traveler, according to NextVacay. Accordingly, if you want to enjoy a domestic vacation with your spouse, it will cost you $3,100. If you plan on departing in nine months, divide the total cost by nine to determine your monthly savings goal, or $344.44 in this case.

Where to Keep Your Savings

Once your checking and savings accounts are amply funded, it may be time to explore additional options. With basic transaction and savings needs covered, opportunities to earn more may be available to you, such as:

• High-yield savings accounts: The FDIC reports the average APY on savings accounts is 0.45% as of September 2023. However, you may earn over 5% APY—over 11 times the average national rate—with the highest-earning high-yield savings accounts available at some credit unions and online banks.
• Money market accounts: Money market accounts have features of both checking and high-yield savings accounts. They often come with minimum balance requirements and transaction limits, but they typically offer competitive interest rates.
• Certificates of deposit: CDs can earn an even higher interest rate than other savings options in exchange for holding your money for a specific term, such as six months or five years. Rates and terms vary depending on the amount of money you have to deposit and the predetermined length of time you choose to keep your money in the account. These deposit accounts work best when you have a medium-to-long-term savings goal and won't need your funds anytime soon. If you anticipate the rates declining, you can lock in a higher rate for the term's duration, which ranges from three months to five years or longer.
• Individual retirement accounts (IRAs) and 401(k)s: Traditional and Roth IRAs and employer-sponsored 401(k) plans are generally the best savings vehicles for your retirement because of their tax benefits. With traditional IRAs and 401(k)s, you make pre-tax contributions, and your money grows tax-deferred. That means you'll end up paying taxes when you make withdrawals in retirement. By contrast, you make Roth IRA and Roth 401(k) contributions after tax, but your account grows tax-free and you can make eligible withdrawals when you retire that are also untaxed.

Establish Healthy Savings and Credit Habits

Ultimately, it pays to be strategic about where you park your money to ensure a balance of financial safety and potential growth. Ensure your checking account has enough to cover your monthly expenses for one or two months, plus a 30% cushion. At the same time, separate your savings money from your everyday spending money to help you meet your savings goals. Direct any surplus money to other savings and investment options like a CD or retirement account, depending on your goals.

Maintaining a consistent habit of saving money is essential for your financial wellness and safety. Maintaining good credit is also a healthy financial habit to practice. Check your credit report and credit score regularly for free with Experian to see where you stand and to head off any potential problems that could harm your score.