My checking account runs pretty lean, so much so that I occasionally have to dip into my savings when my monthly credit card spending runs hot. I’ve long kept most of my cash in savings, and lately, I’ve felt vindicated as interest rates have skyrocketed.
But it’s not as simple as never keeping more than $500 in your bank account or giving yourself a weekly allowance. Follow my method for running a lean checking account to maximize how the money you’re not using right now works for you.
How Much Money Should You Keep in Your Checking Account?
Generally, you should keep at least one month’s worth of expenses in your checking account. Ideally, you’d keep two months’ worth, especially if your expenses or income fluctuate significantly from month to month.
But you may need to adjust this rule based on your individual circumstances. For example, if you’re self-employed, you need a larger checking account buffer to account for unexpected (and hopefully temporary) drops in income.
Why You Need a Checking Account Buffer
A decent buffer ensures you’re not blindsided by big one-off expenses. It also keeps you from having to dip into your savings to cover temporary bouts of unemployment or declines in monthly income.
That said, most checking accounts earn little to no interest, and even the best interest checking accounts can’t compete with savings accounts when interest rates are high. So don’t simply hoard cash in your daily spending account.
Instead, move it to a savings account — or possibly other types of bank accounts — to hold funds you don’t need right away.
How to Set Your Checking Account Balance
Exactly how much you need to keep on hand varies from person to person based on things like income, expenses, and personal habits. Consider these overarching factors when establishing your number.
Monthly Expenses Relative to Income
You need to keep enough money in your checking account to cover recurring monthly expenses like rent or mortgage payments, utility bills, and groceries.
If you haven’t already, figure out how much goes out the door for each of these expenses each month. Calculate how much you earn each month as well, which is an easy calculation unless you have multiple irregular income sources.
You don’t need to make a formal, line-by-line budget, but you do need to have a firm handle on your monthly cash flow. To ensure the most accurate picture, average your monthly expenses and income over at least the most recent three months. Personally, I’d go further and take the average of the last six or even 12 months.
Then just make sure your checking balance is big enough to cover at least a month of expenses at your current spending rate. You may need to find expenses to trim unless you’re in a position to quickly increase your income.
If your job is secure, your expenses are predictable, and you have no big planned expenses on the horizon, you might be able to stop here. You may only need a month’s worth of expenses in your checking account.
If you’re less certain about future income or expenses, keep going until you have at least two months of expenses in your checking account.
If your income and expenses are erratic, you need an even bigger buffer. Build a bigger buffer if any of the following apply:
- You have a traditional job, but your income is commission-based or seasonal.
- You’re self-employed and your income follows boom-bust cycles.
- You care for or provide financial support for family members, requiring you to come up with cash at irregular intervals or take unpaid time off work.
- You’re expecting a significant life change in the near future, such as the arrival of a child.
- Your expenses are difficult to predict for any other reason.
Avoiding Overdrafts & Declined Transactions
It probably goes without saying that you should keep enough money in your checking account to avoid negative balances.
Even if you have overdraft protection, a transaction that would normally result in a negative balance will result in a fee. Some banks charge overdraft fees daily until you deposit enough to cover the shortfall. Read the fine print on your account agreement to find out what yours does.
If you don’t have overdraft protection, you could find yourself in even worse shape if your bank declines to process an important transaction due to insufficient funds. You might not notice that a regularly scheduled payment, like your rent or electricity bill, didn’t go out on time until you get a demand letter. By then, you could have a black mark on your credit too.
It takes more money than you think to eliminate the possibility of overdrafts or declined transactions. For example, you need to be particularly careful around the time your rent or mortgage payment debits from the account since that’s likely your single biggest monthly expense.
Building Your Emergency Fund
Your checking account shouldn’t hold your entire emergency savings fund. But if you have two months’ worth of expenses in it, you can treat the second month’s worth as the first month of your emergency fund, then hold the rest of your emergency fund in a separate account. That ensures you have some extra cash to tap for less expensive emergencies before you need to raid your savings account.
Interest on Checking Balances
Back when savings accounts paid less than 1% annual interest, interest checking accounts were all the rage. Their rates weren’t much better — typically in the 1% to 1.5% range, and you often had to jump through direct-deposit or minimum-balance hoops to get the full yield. But anything helped.
Against that backdrop, it made sense to find an interest checking account you liked and keep a decent chunk of your savings in it. Nowadays, with the best online banks paying 3%, 4%, even 5% on deposits, there’s no point in chasing the interest checking dragon.
For now. High savings yields won’t last forever.
What Should You Do With the Extra Cash?
Once you’re no longer living paycheck to paycheck and your checking buffer is set at whatever goal you’ve set, it’s time to put your cash to work elsewhere. Do the following, in order.
- Pay down debt. Before moving extra cash to a savings account, make a plan to pay down high-interest credit card debt and any other high-interest balances. Because credit card interest rates are so much higher than savings account yields, the amount you save by not paying interest in the future will far exceed whatever the bank pays you.
- Open and fund a high-yield savings account. Next, open a high-yield savings account and seed it with the cash you don’t need right away. In most cases, that’s anything above the one-to-two-month checking account buffer unless you’re saving for a big, imminent-future expense, like a car down payment.
- Create an emergency fund. Make your new high-yield savings account the core of your emergency fund. This fund exists to help cover unexpected expenses without relying on credit cards or loans. When fully funded, it should cover three to six months of expenses or more.
- Invest for the long term. Even if you already have an employer-sponsored retirement plan, invest on your own as well. Open and fund an individual retirement account and contribute regularly — all the way up to the annual contribution limit. If you’re hitting that limit with room to spare, open and fund a taxable investment account as well.
- Treat yourself. Once your emergency fund is set and you’re consistently investing for the future, use some extra cash to reward yourself. For example, I have a handful of single-purpose savings “buckets” — subaccounts within my primary savings account — earmarked for fun expenses like travel and nights out.
Checking Account Balance FAQs
There’s a lot of confusion around how much you should keep in your checking account. If you’re still unsure about anything, check out these answers to common questions about checking account balances.
Should You Keep All Your Cash in a Checking Account?
Not unless you only have enough cash to cover one to two months’ expenses. And if that’s the case, don’t feel bad. You’re in a stronger financial position than folks living paycheck to paycheck.
If you do have more than enough cash to cover two months’ expenses, diversify your cash holdings. The exceptions to this rule involve volatile income, unpredictable expenses, or known big-ticket expenses coming in the near future.
Is It Better to Keep Money in a Checking or Savings Account?
It depends how much money you have. You should ensure you have at least a month’s worth of expenses in your checking account before building your savings account. Once you’ve covered your immediate needs, a savings account is a better long-term investment because it pays interest.
Is Your Money Safe in a Checking Account?
Yes, as long as your bank has FDIC insurance coverage. Look for the Member-FDIC logo on your bank’s website or in your bank’s lobby, or use the FDIC’s bank finder tool if you’re not sure.
Money held in FDIC-insured bank accounts is insured up to $250,000 per account ownership type per bank. So as long as you don’t have more than $250,000 in your name in the same account, you’re good. And if you’re bumping up against that limit, I’m frankly not sure why you’ve read this far.
Managing your checking account balance is crucial for financial stability. A buffer of one to two months of expenses can ensure you have enough money and help you avoid fees and overdrafts. But it’s more financially responsible to invest your excess funds in a high-yield savings account or investment account to earn more money over time.
Determining the right balance for your checking account depends on your individual financial circumstances, including your income, expenses, and spending habits. Evaluate your monthly expenses and adjust your checking account balance accordingly to improve your financial stability and achieve your financial goals.