Checking accounts are a necessity for most people since they make paying bills, buying groceries, and other expenses much easier than they would be with cash alone. That said, you don’t necessarily want all of your funds sitting in a checking account.
Knowing how much to keep in checking depends on your situation, but a general rule of thumb is to have enough of a cushion to last you a couple of months.
General Considerations For How Much To Keep In Checking
When deciding how much to keep in your checking account, consider the following:
It’s best to have enough in your checking account to cover one to two months of regular spending. That includes items such as rent, mortgage payments, bills, food, clothing, entertainment—anything you would normally spend money on over a month.
By having a two-month cushion in your account, you’ll have an easier time avoiding overdraft fees or penalties for failing to meet minimum balance requirements.
Minimum balances and fees
Many financial institutions have minimum balances in effect on checking accounts. Dipping below that amount could result in monthly service fees, so that’s beneficial to consider when deciding how much to keep in checking. If there’s a minimum balance, add that to the amount you should have in your account.
The two-months’ worth of funds plus your minimum balance requirements also helps you avoid overdrawing your account, thereby preventing hefty charges from trying to spend too much.
Limits on transfers between accounts
If you are limited in how often you transfer money between accounts, you’ll want enough of a cushion in your checking account to keep those transfers to a minimum. Your regular spending shouldn’t trigger you to make frequent transfers from other accounts into your checking.
Paycheck schedules and direct deposit
It is worthwhile to take your regular payment schedules and direct deposit into account when determining how much you should keep in checking. If you have a direct deposit that kicks in every few weeks without too much waiting, you might be able to get away with having a little less in your checking account.
Reasons To Limit How Much To Keep In Checking
While it’s important to have enough in your checking account to cover your regular expenses, it is best to keep extra funds elsewhere. The following are a couple of reasons why.
Checking accounts don’t usually offer much—if any—interest. Typically, your funds are more productive in other accounts that offer higher returns, such as savings, money market, or retirement accounts. As such, an excessively large cushion in your checking account is a bit of a waste.
Another factor to consider is security.
If you lose your debit card or your card number is stolen, for example, it’s very easy for someone else to use it. Over time, the result could be high losses due to fraudulent charges, and you might be held responsible for paying those if you don’t catch them promptly. By limiting the amount you keep in your checking account, it keeps the potential losses to a minimum.
All in all, these risks are fairly minimal. Fraudulent charges from your account are pretty easy to notice and resolve, but it is still a risk.
What To Do With Your Extra Money
Rather than let excess funds sit around in your checking account, it’s best to put them to good use in other types of accounts. A few of the options you have available include those listed below.
In addition to having a couple of months’ worth of funds in your checking account, you should keep enough in savings to last you for three to six months. In this way, they act as something of an emergency fund that you can use if you find yourself under financial duress.
Keep in mind that even though savings accounts offer higher rates than checking accounts, they’re not the most stellar option for earning interest.
A retirement account such as a 401(k) can provide much higher dividends than a savings or checking account. Once you have enough in savings, it’s a good idea to start putting a little more toward retirement.
IRAs and certificates
IRAs and other certificates allow you to put money into an account with your financial institution to accumulate interest. These accounts have a set duration—called a term—in which the amount you deposit will yield dividends. The rates offered are quite favorable, and they can help supplement a savings or retirement account.
Investing, such as in the stock market, tends to offer higher potential dividends than most accounts. However, there is more risk associated, so it’s important to consult with a financial advisor before taking this route. A general rule of thumb is to diversify your investment portfolio—meaning you should have funds invested in a variety of ventures and vehicles to minimize the risks.
Spread Your Funds Among Accounts
Your money is most effective—and most secure—when kept in multiple accounts.
With a month or two of funds in your checking account, a few months’ worth in savings, and the rest of your funds accumulating interest in other accounts, you’ll be best prepared to weather financial difficulties and prepare for your future.