Banking

Checking Account Best Practices

How Much Should You Keep In Your Checking Account?

Your checking account is the home base for the rest of your financial life. If you’re like most people, you probably have your paycheck direct deposited there, use it to pay all of your bills each month, and use it for day-to-day expenses like groceries and gas. 

It’s important to know how much money to keep in your checking account to keep your life running smoothly. There’s nothing worse than scrambling to pay a bill at the end of the month or finding your debit card declined at the grocery store because you withdrew too much from your checking account earlier in the month.

The amount you should have in your checking account is different for everyone, but here are a few points to consider when determining the amount that’s right for you.

Monthly budget

To determine how much you should keep in your checking account, you need to have an idea of how much you spend each month. If you haven’t created a monthly budget yet, review your recent bank statements to get an idea of what you’re spending. 

Most people should keep about one month’s worth of expenses in their checking account. However, if you only get paid once per month, you may want to carry closer to six weeks of expenses in your account. This will provide a bit of cushion in the long gaps between paychecks.

Cushion

Speaking of cushions, everyone should have a cushion in their checking account. Overdrawing your checking account has consequences, often resulting in fees for each item that didn’t have sufficient funds. A small, $10 monthly charge that overdraws your checking account could cost you a $30 or higher overdraft fee! Banks earn billions of dollars from consumers each year by charging these fees, and they can quickly add up since fees are usually charged on each transaction.

Due to the costly nature of overdraft fees, it’s a good idea to add a cushion to the one month’s expenses amount in your checking account. A small amount of $100 can cover those forgotten or unexpected expenses, saving you from an accidental overdraft fee.

Note: Some banks charge you a fee if your balance is below their minimum requirements. Verify the requirements of your checking account and make sure that you always have the minimum amount required by your bank to avoid fees.

Irregular expenses

It’s a good practice to review your budget each month and, before the month begins, think about any unusual expenses you may have this month. Add this amount into your checking account for the month so you can cover these expenses. Plan in advance so your checking account covers birthday presents, anniversaries, and irregular bills such as car insurance. Don’t forget to include specific things you are saving for, such as buying a car.

Interest rate

Most checking accounts have tiny or non-existent interest rates. The benefit of checking accounts is the ability to frequently add or withdraw money without incurring penalties, so we can forgive them for the low interest rates they offer. 

However, if you are stashing more cash than you need in your checking account, you’re missing out on interest you could earn. Put those extra funds in a savings account for easy access in the short term, or consider investing them into your retirement account for long-term savings.

Why not just use a savings account?

So if savings accounts offer a higher interest rate, why not just use a savings account instead of a checking account so that you can maximize your interest returns? According to Federal Reserve Board Regulation D, your bank or credit union cannot permit you to withdraw money from your savings account more than six times per month. 

While there are exceptions to this rule, if you make more than six withdrawals in a month your bank could charge you fees or even switch your savings account over to a checking account. If you must dip into your savings account, transfer larger amounts of money to ensure that you don’t hit your six withdrawals per month limit. And if you find yourself needing to withdraw a seventh time, give your bank a call to see if they can help you avoid fees on the transfer.

Following these guidelines will help you determine the best amount to keep in your checking account. The key is to have enough cash to meet your monthly obligations without missing out on interest you could be earning by placing your money elsewhere. As with many things in life, it can be challenging to find the right balance, but after a few months of practice, you’ll be estimating your monthly expenses like a pro.