Keeping too much money in your checking account can cause you to miss out on high potential returns via investing, but not leaving enough funds may mean not having enough cash to cover your essentials like gas and groceries.
The amount of money you should keep in your checking account will depend on factors unique to you, such as how many other liquid accounts you have, what your expenses are and how regular your income is. But if you’re looking for a way to determine how much cash you should have in this account to feel financially secure while not losing out on compound growth, here’s what you need to know.
How much should you have in your savings account?
A typical guideline is to have enough money in your checking account to cover one to two months of expenses, plus a 30% buffer. For example, say you spend around $6,000 on your expenses, including rent, utilities, groceries, gas and fun, like dining out with friends. You’d want to keep a minimum of $7,800 in your checking account.
Keep in mind that financial advisors typically recommend also having an emergency savings account that covers six to 12 months of expenses. You’ll want to keep this separately, like in a high-yield savings account.
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Why it’s important to have a buffer
Having up to two months of expenses plus the cash buffer in your checking account can help make sure you can cover variable expenses and that all bills clear between pay cycles. That way, you won’t have to worry about incurring interest on your credit card or taking out loans to cover surprise expenses.
Saving enough money in your checking account also lets you avoid overdraft fees and maintain minimum balance requirements. Fulfilling the balance requirement often lets you avoid maintenance fees.
You can also invest with more confidence knowing that you have enough money in your bank account to cover short-term expenses. Putting every last penny into your stock portfolio could put you in a position where you’re forced to sell stocks even when the market is down.
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What if you want to save more?
There are many reasons you may want to have more cash available at a moment’s notice, such as if you’re self-employed and your income is somewhat unpredictable or if you’re expecting a large medical bill.
But because most checking accounts don’t pay interest on balances, you’ll probably want to keep that money elsewhere. You will earn more interest if you take any excess cash and move it to a high-yield savings account or a certificate of deposit (CD). Just keep in mind that CDs require you to lock up your cash for a certain period of time — three months to five years — and rates on high-yield savings accounts are variable rates, which means banks can change them whenever they want.
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