How Much Money Should You Keep in Checking and Savings?

How Much Money Should You Keep in Checking and Savings? article image.

No one's going to argue with money in the bank. The cash you keep in your checking and savings accounts allows you to pay bills, live your life and even prepare yourself for future emergencies. But you don't have to stash every penny, and you don't have to keep all your funds in your checking and savings. How much is enough? Let's take a closer look.

How Much Cash Should You Keep in Your Checking Account?

The amount of cash you keep in your checking account is a personal preference, and it may vary throughout the month and from month to month. Generally speaking, the goal is to maintain a balance that helps you minimize or eliminate bank fees and avoid overdrawing on your account.

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 fee.

Calculate your expenses. Track your expenses over a few months to determine what your average monthly outflow is.

Find your level. Many experts recommend keeping one to two months' worth of expenses in your checking account as a base. You might want to aim high if any of the following apply to you:

  • You're a gig worker, rely on tips or have sporadic income.
  • You don't check your account activity and balance frequently, and don't use account alerts to track transactions.
  • Your savings account is at a different bank or credit union and funds will take two or three days to transfer.

Overdraft fees typically range from $25 to $35 per transaction, 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. And the likelihood of a missed loan or credit card payment due to insufficient funds is relatively low.

Even with a few months of expenses in the bank, it's important 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 Cash Should You Keep in Your Savings Account?

In addition to keeping an adequate balance in your checking account, it's a good idea to have a separate savings account. Why?

  • Ideally, you want an additional three to six months' worth of expenses set aside as an emergency fund.
  • You may also want to use separate savings to accumulate money for big-ticket items such as a down payment on a home, a vacation or a new car.
  • You're less likely to "accidentally" spend money if it isn't lying around in your checking account.
  • You can earn interest on your savings.
  • If your checking account is hacked, you'll have a ready source of funds while the bank sorts out your claim.

Accumulating three to six months' worth of expenses—plus any savings you may be piling up for discretionary spending—can take a bit of discipline. Setting aside a dedicated percentage of each paycheck is one way to create a savings routine. Many financial institutions also have automatic savings services that will sweep money from your checking to savings on a regular basis. Also key: Don't raid your savings account to cover everyday expenses. When you do use savings to pay for emergencies, build it back up as soon as you're able.

Although savings accounts may not seem like the most exciting financial products to shop for, there are differences between accounts you may want to consider. In June 2021, starting interest rates on regular savings accounts hovered around 0.01%. At this rate, a $10,000 account would earn $1 in interest per year. A typical high-yield savings account, on the other hand, might offer around 0.5% interest—earning about $50 in interest on the same $10,000 account.

Many regular savings accounts also charge maintenance fees, ranging from $5 to $12 monthly. Sometimes, these fees can be waived by maintaining a minimum balance or linking multiple accounts. But paying $60 to $144 a year in fees can easily cancel out—and even reverse—the progress you make with interest.

When you're ready to start saving, shop around for a bank account. Some of the best rates and terms on high-yield savings accounts are with online banks like Marcus or Vio Bank, but many banks and credit unions also have high-yield accounts. Look for accounts that enable you to bypass monthly fees as well.

Best Places to Store Additional Cash

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. Consider:

  • Money market and CD accounts: Money market accounts are similar to high-yield savings accounts. They often come with minimum balance requirements and transaction limits, but they typically offer competitive interest rates. Certificates of deposit, or CDs, can pay higher interest still. 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. CDs aren't great for emergency funds: If you end up needing the money before the CD matures, you may lose the interest and pay a penalty. For "extra" money you don't intend to spend, however, CDs may earn you a bit more in interest without much additional risk.
  • Retirement or education accounts: If you'd like to save toward major life goals like retirement or paying for college, explore the tax advantages of traditional and Roth IRAs or 529 education plans.
  • Investments: Because investing in stocks, bonds or mutual funds comes with additional risk, the time to open an investment account is usually after you've covered your checking and savings needs and are funding a retirement account or college account. If you're interested in investing, take the time to learn more about your options. In addition to considering an experienced financial advisor, you may be able to start out with app-based investing or a robo-advisor.

Smart Funding Lays the Groundwork

Spending and saving—checking and savings—are the push and pull of personal finance. Keeping your accounts properly funded with one or two months of expenses in checking and another three to six months of expenses in savings helps you balance these forces and can form the foundation for reaching larger goals like investing, saving for retirement or building wealth.

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