How Much Money Should You Keep In Your Checking Account?

I get asked a lot from readers how much money should someone have in their checking account.

As much as I would love to give an exact answer, like $2,000 it is not possible.

And even though the average checking account balance is $10,618 per the Federal Reserve, this is not a good number to base your finances on.

This is because everyone’s situation is different and so each person will have different balance requirements.

Nevertheless, here is a guideline to help you know how much money should you keep in your checking account.

How Much Money Should You Keep In Your Checking Account?

What Is A Checking Account?

how much money should you keep in your checking account

A checking account’s sole purpose is to house money that is coming in and will be going out for your monthly expenses.

As such, using it for its intended purpose makes it easier for you to free up your excess funds for better uses, like saving and investing.

Sadly, too many people use a checking account wrong.

They keep all of their money in this type of bank account.

While it makes handling your finances easier, it is not ideal.

This is because when you have money in your checking account, you spend it.

Because of this many people don’t get ahead financially because they are not actively putting extra cash into a separate savings account.

It’s important you make sure you use a checking account as it was intended, to help you pay your monthly bills. 

Then take additional funds and set up an automatic transfer to move it to a savings account.

With that being said, how much money should you keep in your checking account?

Advice will vary depending on who you ask, so let’s dive into some helpful tips to make sure you have the right amount. 

If You Have Steady Income And Good Spending Habits

You can rely on your income and you have good spending habits, having one to two month’s worth of living expenses should suffice in this scenario.

Why?

This amount will cover your everyday expenses as well as leave an extra cushion in the event any of your variable expenses, like a utility bill is higher than usual.

If You Anticipate Going Over

Things happen, like checks bouncing or your account getting overdrawn.

Additionally, not all of your monthly expenses are going to stay the same.

For example, items like utilities or groceries may fluctuate on a monthly basis, requiring you to pay a bit more for the month.

Finally, there are those with fluctuating incomes who may need to save more in order to avoid running out of income for their monthly spending.

In any of these scenarios, it’s best to add an extra 30% or more to your total checking account balance to avoid not having enough money to pay for any unforeseen expenses.

This additional cash will also limit the chances of overdraft fees as well.

Although this may not be applicable to everyone, it’s always better to be safe than sorry. 

Keep Certain Bank Account Terms In Mind

Some banks are very relaxed with the terms and conditions of your account.

Some banks may have no fees or no account balance requirements that you must maintain in order to avoid fees.

Meanwhile, others will require you to keep a minimum balance in your checking account to avoid monthly service charges.

Do your due diligence and understand the terms and conditions of your checking account before you move any money out.

Although having a checking account is a must for every individual, it’s important to know exactly what you signed up for so you don’t end up making any mistakes that may cost you somewhere along the way. 

How To Determine Your Ideal Checking Account Balance Amount

To get a better idea of exactly how much money you should have in your checking account, here is a simple formula you can use.

First, review your monthly budget to get a total of your monthly spending.

If you don’t have a budget, review your bank statements and credit card statements to get an idea of your living expenses, like your rent or mortgage payment, groceries, utilities, etc.

Add 10% to this number to account for fluctuations in your variable spending categories.

Next, add in any minimum balance requirement your checking account requires.

Finally, add a cushion to cover expenses you might have not included in the first step or to cover you in case you go a little overboard with your spending.

Let’s walk through an example using the above formula.

Let’s say you calculate your monthly expenses to be $2,000.

Next add 10% to this to get to $2,200.

Our hypothetical checking account has a $1,000 minimum monthly balance requirement to avoid fees, so we add this to get to $3,200.

Now we add an additional cushion.

We could add another 10% or a flat dollar amount.

We’ll add 10% or $320 to get to $3,520 as the amount of money to keep in this checking account.

How Much Is Too Much Money In Your Checking Account?

Now that you have an idea of the amount of money you should have in your account, what amount is too much money?

Anything more than 3 months of expenses would be considered too much money in your checking account.

Using the example from above, it you have more than $10,560 in your checking account, you should consider moving some to another account.

If you budget your money and follow it, you could even say anything more than $7,040 in your checking account is too much.

What To Do With Excess Money

If you limit the overall amount of cash that you have in your checking account, where should you be putting the excess money that you’re making each month?

While everyone’s situation will be different, here are a few ideas to help you get started. 

Build Up Your Emergency Fund

Financial stability is not always a guarantee.

Everyone should have a personal emergency fund designed to tackle any unexpected expenses or support them in the face of a major personal loss or job loss.

Generally, the consensus is to save up 8 to 12 month’s worth of expenses, although you could always save more to make sure that you’re covered in the event of more serious situations. 

Save Money For Other Savings Goals

After you built up your emergency fund, you can start to put money towards other savings goals you might have.

Maybe you want to save for a vacation, a new car, or for a house.

Open a savings account for each of these goals and make it a point to fund each of them every month, or rotate through them, saving for one goal this month, another goal the next month, and so on.

Ideally you will save your money in a high-yield savings account so you can get the highest interest rate on your money and take advantage of compound interest.

Put Extra Money Towards High Interest Debt

If you have any debt, like credit cards or student loans, you can use the excess cash in your checking account to pay off these debts faster.

The sooner you can eliminate these payments, the quicker you free up the money you are paying every month.

You can then use this money to boost your savings and investments.

Invest Your Money

No matter where you are in life, you likely have financial goals you’re trying to reach.

For example, some short-term goals of yours may be to buy your own house.

If you’re looking to the future, you may be more focused on retirement.

Regardless of what your end goal is, investing your money so that you can grow your wealth is crucial to your financial health. 

Opening an investment account with a robo-advisor like Betterment will help you reach your goals, while also having people knowledgeable about investing hold your hand along the way.

As scary as investing might be to some of you reading this, it is an important thing to do as it allows you to keep ahead of inflation and make reaching your financial goals a reality.

Final Thoughts

At the end of the day, there is no one answer for how much money you should keep in your checking account.

This is because everyone’s situation is different and why personal finance is so personal.

Hopefully the information in this post leads you to a better idea of how much money you should keep in your account and helps you to move some of your excess money into other accounts so you can get ahead financially.

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