Your checking account can help you cover everyday expenses and ensure that you don’t have to tap into your savings account. However, keeping too much money in your checking account isn’t the best approach either since these accounts have low APYs. The right amount to keep in your checking account varies for each person, and this guide will give you some clarity on how much you need.
The Importance of Managing Your Checking Account Fund
Staying on top of your checking account ensures that you have enough cash to pay your bills on time. Making on-time payments for your credit card will improve your FICO score and minimize your interest payments. Having a sufficient balance can also help you avoid overdraft fees.
How Much Money Should You Keep in Your Checking Account?
The amount you should keep in your checking account depends on your monthly expenses. You should at least have enough money to keep up with living costs. Any excess money that you may need within the next 1-3 months can go into a high-yield savings account, so it earns more interest.
Factors to Consider
The right balance differs for each person. These are some factors to keep in mind when determining how much you need in your checking account.
Monthly Expenses
Reviewing past bank statements and credit card statements can help you calculate your monthly payments. You can also write a list of consistent monthly expenses, such as streaming subscriptions.
Emergency Fund
People who don’t have as much cash in their emergency funds may want to put more money into that account. When the emergency account can cover several months of living expenses, it may be beneficial to keep some extra money in your checking account. That way, it doesn’t become a habit to tap into your savings account to cover living expenses.
Upcoming Large Payments
Anticipating a large payment in advance can minimize its impact on your finances. It’s a good idea to keep more money in your checking account leading up to a big expense.
Income Frequency and Stability
People with predictable monthly income can reliably keep the same amount of money in their checking account each month to account for expenses. However, you may want to keep extra money in your checking account if your income fluctuates.
What Experts Recommend
Listening to experts can give you a better idea of how much money you need in your checking account. Considering these expert recommendations while forming your own opinions based on your financial situation can lead to an optimal outcome.
Industry Standards
It’s a common rule of thumb to keep 1-2 months of living expenses in your checking account at all times. If you make $7,000 per month, you should aim to keep $7,000 to $14,000 in your checking account.
Financial Advisor Opinions
Many financial advisors also believe that it’s good to have 1-2 months of expenses in your checking account at all times. It gives you enough of a buffer to wait for additional income while giving you the cash to cover your expenses.
Calculating Your Optimal Balance
Here’s what you need to know about determining the right amount of money to keep in your checking account.
Assessing Monthly Fixed Costs
Everyone has fixed monthly costs, such as a mortgage, auto loan payments, and subscriptions. Reviewing all of your fixed monthly costs can give you an opportunity to trim your expenses by removing the non-essentials. However, it’s good to know this number so you can determine the ideal balance for your checking account.
Accounting for Variable Expenses
While some expenses always show up and cost the same, other costs vary. For instance, the prices of groceries may fluctuate in some months. Furthermore, your electrical bill will be different each month.
Factoring in Emergency Savings
It’s good to expect the unexpected. Any accidents, injuries, medical bills, and other events that are difficult to predict can have a major impact on your finances. Keeping a financial buffer for these expenses will put you in a better financial position.
How Maintaining an Optimal Balance Can Benefit You
It takes considerable time and monitoring to ensure you have the optimal checking account balance. Here’s why it’s worth the effort.
Avoiding Overdraft Fees
A sufficient checking account can help you avoid overdraft fees, which can get as high as $34 per transaction when you have an overdrawn account.
Maximizing Interest from Savings
Having enough money in your checking account and putting the rest into savings maximizes your interest payments. Savings accounts tend to have higher APYs than checking accounts, but it is possible to find checking accounts with respectable APYs if you consider online banks.
Ensuring Financial Peace of Mind
It’s easier to address living expenses and other costs if you have enough money in your checking account. This financial peace of mind is priceless and can make you feel happier and more at ease.
Is It OK to Have a Lot of Money in Checking Accounts? The Risks
While it’s beneficial to have a lot of money in your checking account, there are some risks to keep in mind.
Missed Investment Opportunities
The stock market, real estate, and other assets tend to outperform bank account APYs in the long run. You can miss out on considerable gains if you keep all of your money in your checking account.
Potential for Impulse Spending
Having too much money in your checking account can result in bad financial decisions. For instance, some people may feel inclined to spend extra money because they have it sitting around. If you don’t have as much money in your checking account, you may be less likely to make impulsive purchases.
Lack of FDIC Coverage
Once your checking account exceeds $250,000, the FDIC does not protect all of your money. Every dollar above $250,000 is not insured. This is a good problem to have, but it is a risk for some people to consider.
Best Places to Put Extra Funds
You don’t have to keep all of your money in a checking account. These are some of the other options to consider.
High-yield Savings Accounts (HYSA)
This bank account has a variable interest rate and no check-writing privileges. Most of these accounts limit you to six withdrawals per month before charging a fee for each additional withdrawal.
Certificates of Deposit (CD)
These accounts have fixed interest rates and maturity dates. CDs give you predictable payments for the length of the account. You may incur a penalty fee if you withdraw from a CD early, but some of these accounts have no penalty fees. Opting for a CD with no penalty fee usually results in a lower APY.
Money Market Accounts (MMA)
Money market accounts have variable interest rates that are typically lower than high-yield savings accounts. However, these accounts have check-writing privileges, and some of them even have debit cards.
Investments
Investors can put their capital to work in assets like stocks and real estate. Stocks are very liquid and don’t require much capital to get started. Real estate may be a good option for people who have more capital and want cash flow. While both investments offer tax advantages, real estate has better tax advantages than stocks.
Conclusion: Tools and Strategies to Manage Your Checking Account
Monitoring your checking account’s balances and trimming your expenses can help you during emergencies. You’ll also have an easier time keeping up with monthly expenses and building a buffer in the process.
Many banks offer tools and resources that let you monitor your spending. Some banks also provide personalized insights that can move you closer to your financial goals. If you want an optimal checking account, you must commit to it for multiple years and stay on top of your finances once you achieve your initial goals.
