It can be a good move to keep one to two months’ worth of living expenses in your checking account, plus a buffer of about 30% of that amount.
For some people, that will be a stretch. For others, the preference may be to stash more there. While you may like to see a robust balance in your checking account, you want to have “just enough” on deposit (or enough to meet a minimum balance requirement).
Here’s why: A checking account likely pays very low or no interest, so additional funds are better stowed elsewhere, so your money can grow. Read on to learn more about this topic and how to determine the right amount to keep in your checking account.
Key Points
• Maintaining one to two months’ worth of living expenses in a checking account, along with a 30% buffer, is generally advisable for financial stability.
• Monthly income and expenses should be assessed to determine the appropriate balance for a checking account, ensuring enough funds to avoid overdrafts.
• Major upcoming expenses and savings goals should influence the decision on how much money to keep in a checking account, encouraging transfers to higher-interest savings.
• Checking accounts typically offer low or no interest, making it beneficial to keep only necessary funds there while saving excess money in accounts that yield higher returns.
• Tracking spending closely and automating savings transfers can help maintain an optimal checking account balance, allowing funds to grow in savings accounts instead.
What Is a Checking Account?
First things first: A checking account is a type of deposit account that is held at a traditional bank, online bank, or a credit union. It provides a secure spot for your funds (thanks to FDIC or NCUA insurance) and can be the foundation of your daily financial life.
For instance, your paycheck can land there by direct deposit; you can withdraw funds from your account by using an ATM, making a transfer, and more. And you will likely have a debit card that’s linked to the account which allows you to easily spend as you stock up at the supermarket or grab a cold brew.
A few other details to note:
• Checking accounts typically allow you unlimited transactions, but they probably earn no or very low interest. The average checking account currently earns 0.08% in interest, according to the Fed. It can be wise to consider high-yield checking accounts or premium accounts to see if you can snag a higher return.
• Some checking accounts are available fee-free, but they may have minimum deposit requirements and some surcharges. It’s wise to read the fine print on an account you currently have or are contemplating opening to know the full story.
If you’re curious how much others keep in their checking accounts, the Federal Reserve’s recent Survey of Consumer Finances (based on 2022 data) found that Americans keep a median balance of $8,000 in their transaction accounts, which include checking and savings accounts, among others. The average amount in checking and other transaction accounts is $62,410, but that number’s pulled up by those with higher net worth.
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Factors to Consider
When deciding how much money you should have in a checking account, there’s no one-size-fits-all number. Instead, consider these factors:
Monthly Expenses and Income
To determine how much cash to keep in your checking account, you’ll first want to tally your monthly income and expenses — those two numbers are vital. For example, if you net $8,000 a month in pay and your usual expenses (housing, utilities, food, healthcare, “fun” spending, etc.) are $7,000 a month, you might want to aim for a balance of $10,000 to $15,000 in the account at any time.
This would give you one to two times your monthly expenses, plus a little overage. That overage is important, as it’s your buffer in case your spending were to increase one month (say, a mega dental bill). You don’t want to wind up in overdraft.
If you need help tallying or tweaking your monthly expenses vs. income, there are a variety of budgeting methods that can help you out.
Upcoming Large Expenses
When deciding how much to keep in your checking account, you may want to account for any major expenses coming your way. Perhaps you pay your homeowners insurance annually or your partner’s big birthday is coming right up. You’ll want enough money accessible to cover those.
Savings Goals
On the other hand, you don’t want to let too much cash just sit in your account when it could be working harder for you. You can transfer any excess funds into a savings account where you will likely find much higher interest rates.
For instance, the average savings account has 0.57% interest as of May 2024, which is an improvement over checking’s 0.08%. Also, online-only banks may offer rates in the range of 4.5% for their savings accounts. Higher interest (and more frequent compounding) can help plump up your savings for a summer vacation, new car, or down payment on a house.
In addition, you may want to prioritize stockpiling some money in an emergency fund, which financial experts say should have at least six months’ worth of living expenses in it.
Account Fees and Requirements
As you compare checking accounts, be sure to drill down on account fees and requirements. Fees can nibble away at your money, and there are quite a number that can be assessed. There are account maintenance fees, overdraft fees (at about $35 a pop), out-of-network ATM fees, and more. Read the fine print (or look at your statement if you already have an account) to see where you stand. Then you can make a choice that helps you avoid bank fees.
Also note that there may be requirements for your account, such as keeping a certain amount on deposit or using your debit card a certain amount per month. If you don’t meet the guidelines, you could wind up paying more fees as well.
The Basic Living Expenses Approach
As mentioned above, one popular approach for how much money you should keep in a checking account is to have one to two months’ worth of living expenses on deposit.
Need help calculating that number? Tracking your expenses can be done fairly simply by reviewing a couple of months of your current checking account statements and totaling how much flowed out. Some accounts have a dashboard that make it extra easy to see your spending.
Or you could add up your typical expenses the old-school way, using an online spreadsheet or pencil and paper. You will want to include such costs as housing, transportation, food, utilities, clothing, healthcare, loan payments, credit card payments, dining out, entertainment, streaming services, insurance, and the like.
If your usual expenses were, say, $6,000 a month, you might want to keep somewhere between $8,000 and $14,000 in your checking account.
Recommended: Checking vs. Savings Accounts: A Detailed Comparison
Earning Interest vs. Liquidity
Another way to look at how much money you should keep in your checking account is to balance two financial forces: earning interest and liquidity.
Typically, in order to pay out higher interest, a financial institution needs to feel confident that money will be accessible for them to use for other business purposes. That is why savings accounts, which used to allow only a limited number of transactions per month (incidentally, some banks still enforce this guideline), will pay a higher interest rate.
Similarly, a certificate of deposit (CD) will likely pay more than a checking account, because the customer agrees to keep their funds in the account for a specific period of time.
The other side of the coin is liquidity, meaning that you can access money on demand, without fees or penalties. This is what a checking account excels at. You may not earn much (or any) interest, but you know you can withdraw funds and pay bills from it as often as you like.
For this reason, you probably want to keep just enough cash in checking to pay bills without overdrafting, while moving any additional funds into savings (perhaps earmarked as an emergency fund) to reap a higher interest rate.
Recommended: Checking Account Pros and Cons
Tips for Right-Sizing Your Balance
As you fine-tune the amount of money you keep in your checking account, try these tactics:
Track Spending Closely
You may think you know how much your monthly expenses are, but tracking the exact amount can be a very helpful exercise as you think about your bank account balances. For instance, you may not be accounting for such spending as gifts for friends and family, subscriptions, prescription medications that refill every three months, contact lenses, and charitable donations.
Some banks provide tools to help you track your spending, or there are apps and websites that can give you a fuller picture. As you comb through your spending, you may also find places where you can easily trim some money.
Automate Savings Transfers
One way to make sure you are building your savings is to set up automatic transfers from your checking account to savings. This can be a seamless, no-effort way to make sure money doesn’t just sit in checking.
You might automate your money by having recurring transfers from checking to savings right after you are paid. That can help you avoid spending when you see money piling up in checking, and it moves money to where it can earn interest.
Take Advantage of Personal Finance Apps
As noted above, there are personal finance apps that can help you manage your money. First check your current bank; they may offer helpful tools. There are also paid apps (like YNAB and PocketGuard) available for budgeting, typically for $8 to $15 a month.
Or you might want to take advantage of round-up apps that can help build your savings as you spend. These round up the price of purchases to the next dollar and send the difference into your savings account (or investments) so it can help build your wealth, bit by bit.
The Takeaway
Keeping slightly more than one to two months’ worth of living expenses in your checking account can be a good rule of thumb. Any additional funds can work harder for you when transferred to a savings account, where they can earn interest and help your money grow.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
Is too much in checking a bad idea?
While not exactly a bad idea, keeping too much money in your checking account can mean you are missing out on the opportunity to earn interest and help your money grow.
What is the average checking account balance?
The average transaction account balance (which includes checking and savings accounts) is over $62,000, but that skews high due to those who are wealthier. The median figure is $8,000.
What does it mean for money to be liquid?
When money is liquid, that means it can be accessed on demand. For example, cash in the bank is liquid; the equity you have in real estate is not, since it would require effort to secure funds related to that investment.
Photo credit: iStock/JLco – Julia Amaral
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