Your checking account is the center of your financial life. It’s where your paycheck lands, bills get paid, and everyday purchases happen. But how much money should you actually keep in your checking account? Having too little in your checking account could lead to overdraft fees and missed payments, but keeping too much money in there might mean missing out on opportunities to grow your savings. In this article, we’ll break down expert advice, common mistakes, and smart strategies to help you find the right balance.
The Role of a Checking Account
A checking account is designed for daily use. It’s typically used for:
Unlike savings accounts or certificates of deposit (CDs), checking accounts usually don’t earn much interest. Some banks, like Bank5 Connect, do offer high-interest checking accounts, but even those often pay less than high-yield savings or CD accounts.
If you’re looking to grow your money, savings accounts, CDs, and investment accounts like retirement or brokerage accounts are better options. These accounts are built for saving and investing—not daily spending.
General Guidelines from Financial Experts
So, how much should you keep in your checking account? Most financial experts suggest keeping one to two months’ worth of living expenses in your checking account, plus a 30% buffer for unexpected costs or bills that fluctuate month to month.
Example:
If your monthly expenses are $3,000:
• One month = $3,000 (30% buffer would be $900)
• Two months = $6,000 (30% buffer would be $1,800)
• Aim to have between $3,900 and $7,800 in your checking account
This range will help ensure you have enough money in your checking account to cover your bills and avoid overdrafts.
Risks of Keeping Too Little in Your Checking Account
If your checking account balance is too low, it puts you at risk of:
Risks of Keeping Too Much in Your Checking Account
On the flip side, keeping too much money in your checking account can also be risky. It can lead to:
Factors That Influence Your Ideal Balance
Everyone’s financial situation is different, so your ideal checking account balance might not look the same as your neighbor’s. Here are a few things to consider:
Where SHOULD You Put Your Extra Cash?
If you have more money than you need in your checking account, consider moving it to an account that can better help you achieve your savings goals. Options include:
Tips for Managing Your Checking Account Balance
No matter what balance you decide to aim for in your checking account, it’s important to keep tabs on it. Here are some easy ways to monitor and manage your checking account balance:
Finding the right balance in your checking account isn’t about hitting a magic number. It’s about matching your money to your lifestyle, habits, and goals. By keeping enough to cover your expenses, and a little extra for safety, you can avoid fees and stress. And by moving extra cash into your savings or investment accounts, you’ll make sure your money is working for you.
Take a moment to look at your current checking balance. Is it too low? Too high? Just right? If you’re ready to make your money work smarter, explore Bank5 Connect’s high-interest checking and savings accounts today.
The Role of a Checking Account
A checking account is designed for daily use. It’s typically used for:
- Receiving direct deposits (like your paycheck)
- Paying bills (like rent, utilities, and subscriptions)
- Making everyday purchases (groceries, gas, coffee, etc.)
Unlike savings accounts or certificates of deposit (CDs), checking accounts usually don’t earn much interest. Some banks, like Bank5 Connect, do offer high-interest checking accounts, but even those often pay less than high-yield savings or CD accounts.
If you’re looking to grow your money, savings accounts, CDs, and investment accounts like retirement or brokerage accounts are better options. These accounts are built for saving and investing—not daily spending.
General Guidelines from Financial Experts
So, how much should you keep in your checking account? Most financial experts suggest keeping one to two months’ worth of living expenses in your checking account, plus a 30% buffer for unexpected costs or bills that fluctuate month to month.
Example:
If your monthly expenses are $3,000:
• One month = $3,000 (30% buffer would be $900)
• Two months = $6,000 (30% buffer would be $1,800)
• Aim to have between $3,900 and $7,800 in your checking account
This range will help ensure you have enough money in your checking account to cover your bills and avoid overdrafts.
Risks of Keeping Too Little in Your Checking Account
If your checking account balance is too low, it puts you at risk of:
- Overdraft fees and insufficient funds (NSF) fees: These fees can occur if you attempt to spend more than what’s in your account, and they can add up quickly.
- Bounced payments: If you try to make a payment and it doesn’t go through due to insufficient funds, it could lead to missed payments or late fees, both of which can negatively impact your credit score.
- Account closure: Repeated overdrafts or a consistently negative balance can result in your bank closing your account. When this happens, it can make it harder for you to open new accounts in the future.
Risks of Keeping Too Much in Your Checking Account
On the flip side, keeping too much money in your checking account can also be risky. It can lead to:
- Lost interest: Most checking accounts earn little to no interest, which means your money isn’t growing while it sits there. By keeping large amounts in checking, you miss out on the opportunity to earn higher returns through savings accounts, CDs, or investment accounts.
- Fraud risk: Because checking accounts are designed for daily use, they are often connected to multiple platforms such as mobile payment apps, subscription services, ATMs, and point-of-sale (POS) systems. They may also be used for writing physical checks, which are especially vulnerable to fraud such as check washing or forgery. Because of this, checking accounts are more susceptible to fraud than savings accounts, which are typically accessed less often and are not usually linked to external payment systems.
- Temptation to spend: Seeing a big balance might make you more likely to overspend. It’s easy to feel like you have more financial freedom than you actually do, which can lead to impulse purchases or relaxed budgeting. Keeping a leaner balance in your checking account encourages more mindful spending and helps you stick to your financial goals.
Factors That Influence Your Ideal Balance
Everyone’s financial situation is different, so your ideal checking account balance might not look the same as your neighbor’s. Here are a few things to consider:
- Income stability: If your income is steady, you might not need as big of a buffer as someone whose paychecks fluctuate.
- Spending habits: If you use your debit card for a lot of one-off, unplanned expenses throughout the month, you might need more in checking than someone who only uses their account to pay recurring bills.
- Minimum balance requirements: If your checking account requires a minimum balance in order to avoid a monthly fee, you should ensure your balance is always high enough, or consider switching to an account without a minimum balance requirement.
- Emergency savings: If you have a separate emergency savings account that you can easily transfer funds from, you may not need to keep as much in your checking account. Just be sure to keep tabs on your balance so you can transfer funds when needed.
Where SHOULD You Put Your Extra Cash?
If you have more money than you need in your checking account, consider moving it to an account that can better help you achieve your savings goals. Options include:
- High-yield savings accounts: These earn more interest than regular savings accounts, but still allow you to access your funds easily when you need them.
- CD accounts: CDs typically have higher interest rates than savings accounts, and you can lock in your rate for a set period of time. However, CDs are less liquid than a saving account. You’ll typically be faced with early withdrawal penalty fees if you withdraw your money before the CD term is over.
- Investment accounts: Brokerage accounts, and retirement accounts like IRAs and 401(k)s, allow you to invest in stocks, bonds, and other assets. In the long-term, they have the potential for greater returns, but are a riskier option than traditional, FDIC-backed bank accounts. Investment accounts are typically viewed as an essential part of an overall wealth building strategy, but it’s crucial to assess your risk tolerance and any potential tax implications before investing.
Tips for Managing Your Checking Account Balance
No matter what balance you decide to aim for in your checking account, it’s important to keep tabs on it. Here are some easy ways to monitor and manage your checking account balance:
- Use budgeting tools or apps: Track your monthly income and expenses so you’ll know whether you need an extra cushion or have a surplus to move to savings.
- Set up low balance alerts: Get notified when your balance reaches a critical level.
- Automate transfers: Schedule funds to move from your checking account into your savings or investment accounts automatically.
- Review your balance regularly: Make it a habit to check your account balance at least once a week.
Finding the right balance in your checking account isn’t about hitting a magic number. It’s about matching your money to your lifestyle, habits, and goals. By keeping enough to cover your expenses, and a little extra for safety, you can avoid fees and stress. And by moving extra cash into your savings or investment accounts, you’ll make sure your money is working for you.
Take a moment to look at your current checking balance. Is it too low? Too high? Just right? If you’re ready to make your money work smarter, explore Bank5 Connect’s high-interest checking and savings accounts today.