Finding Your Financial Balance: How Much Money Should I Keep in My Checking Account
A common way to host your monthly expense funds is with a checking account. The amount of money you should keep in your checking account depends on several factors, including your financial situation, spending habits, and financial goals.
I’m Aaron Batkay. Today I’ll discuss some considerations that can help you determine an appropriate amount:
You will want to keep enough money in your checking account to cover your monthly expenses such as rent or mortgage payments, utilities, groceries, and other regular bills. If you have automatic deposit for your paycheck into your checking account, you should be able to cover these key expenses without much worry. Whether you like to write checks and mail in bills or you set up automatic electronic payments, insuring you have enough for monthly, recurring bills is a top priority.
You should have some savings for unexpected expenses that would need a quick turn around for payment. It's wise to maintain a buffer in your checking account to cover unexpected expenses like car repairs, medical emergencies, or home maintenance. Consider 1-2 emergencies in your life that could need immediate payment, how much would those cost? This line of thinking is a good start for a checking account buffer above your expected monthly bills.
Make sure you have enough funds in your checking account to avoid overdraft fees and penalties. Many financial experts suggest keeping at least one month's worth of expenses as a minimum buffer. Check with your bank or credit union to find out to understand their overdraft policies. Fees can be as high as $25 or more.
If you receive income irregularly or in large lump sums, you might need a larger buffer in your checking account to cover expenses until the next income arrives. It acts as a cushion to cover expenses during months when income is lower than usual. To determine how much buffer you need in your checking account, consider your average monthly expenses and the variability in your income. A general guideline is to aim for at least one to three months' worth of expenses as a buffer for individuals with variable income. Depending on your comfort level and the stability of your income sources, adjustments may be necessary based on your specific financial situation and goals.
While your emergency fund (3-6 months of living expenses) is typically kept in a separate high yield savings account for better interest rates, it also creates an added step to use those funds, preventing easy access for non-emergency spending. Having a small portion of these emergency funds in your checking account can be practical for immediate needs. This ensures you can handle unexpected expenses without relying on credit or incurring overdraft fees.
If you have specific savings goals or investment plans, keep the necessary funds in your checking account to transfer to savings or investment accounts when needed. For investments or savings goals that require timing or specific opportunities, keeping funds in your checking account allows you to act swiftly when favorable conditions arise. This could include market investments, real estate down payments, or business opportunities.
While checking accounts generally offer lower interest rates compared to savings or investment accounts, the convenience and accessibility they provide may outweigh the potential interest earnings, especially for short-term needs. Keeping excess funds in a checking account may not yield optimal returns compared to higher-interest savings or investment accounts, but for upcoming or unexpected expenses that need a quick turn around for payment, being liquid is highly preferred.
In summary, the amount you should keep in your checking account should cover your regular expenses, provide a buffer for emergencies, and be tailored to your individual financial circumstances and goals. It's a balance between accessibility and optimizing your finances for growth and security.
If you’d like to discuss your personal finances and develop your own plan for saving, give us a call at 518.406.5624. Thanks for watching.