Figuring out how much to keep in your checking account is crucial for managing your finances effectively. Balancing enough funds to cover daily expenses while maximizing savings elsewhere can be tricky.
We'll help you determine the right amount of money to keep in your checking account, ensuring you stay prepared without missing out on potential interest earnings.
What's the right amount of money to keep in a checking account?
One helpful rule of thumb is to keep one to two months' worth of spending in your checking account. If you prefer an extra safety net, consider adding 30% to that number as a buffer. So if your monthly expenses total $3,000, you'd want to keep between $3,000 to $7,800 in your checking account.
The rest of your funds should go to savings accounts or retirement and investment accounts.
Compare checking accounts
We recommend comparing checking accounts to make sure you're getting the best fit for you. Here's a list of our favorite accounts.
| Account | APY | Promotion | Next Steps |
|---|---|---|---|
Open Account for Quontic High Interest Checking OnQuontic'sSecure Website. Member FDIC. Rating image, 4.00 out of 5 stars. 4.00/5Our ratings are based on a 5 star scale.5 stars equals Best.4 stars equals Excellent.3 stars equals Good.2 stars equals Fair.1 star equals Poor.We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs. | up to 1.10% Min. to earn: $1 | High APY when you complete 10 or more qualifying debit card purchases each month | Open Account for Quontic High Interest Checking OnQuontic'sSecure Website. |
Open Account for Discover® Cashback Debit OnDiscover Bank'sSecure Website. Member FDIC. Rating image, 5.00 out of 5 stars. 5.00/5Our ratings are based on a 5 star scale.5 stars equals Best.4 stars equals Excellent.3 stars equals Good.2 stars equals Fair.1 star equals Poor.We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs. | 0% Min. to earn: N/A | Earn 1% cash back on up to $3,000 in debit card purchases each month (see details when you click 'Open Account') | Open Account for Discover® Cashback Debit OnDiscover Bank'sSecure Website. |
Why should you keep 1-2 months worth of expenses in a checking account?
The rationale for keeping at least one or two months' worth of expenses in a checking account boils down to four reasons.
1. You'll largely avoid the risk of an overdraft
Even the wealthiest people can slip up and spend more than they have in their checking account. If your checking account balance falls below $0, you'll incur overdraft fees. You could pay $35 or more for every transaction made while your balance is below $0.
Since some traditional banks charge you for up to four to six overdraft fees, you could be hit with up to $210 in charges for multiple overdrafts in a single day. Many banks offer overdraft protection, typically for a fee, to protect you from these extra charges.
2. Pre-authorization holds can hurt
Some merchants are notorious for putting "pre-authorization holds" on debit cards.
For example, if you use your debit card to buy gas, the gas station may place a hold on your card for up to $100. This reduces your available balance (but not your actual balance) by that amount. When the actual purchase amount clears your account, the gas station will then release the hold.
Pre-authorizations can tie up your money until they are released. They are commonly used by hotels and rental cars, and can tie up your money for days at a time.
3. You'll need to meet the minimum balance requirement
Most traditional banks require you to maintain a minimum account balance to avoid monthly service charges. These typically range from $100 to $2,500, though most are much closer to the lower end.
If your bank has a particularly high minimum balance requirement, you don't want to have to worry about how much to keep in your account. Your priority should be to switch to a no-fee, no-minimum balance online checking account.
4. You need some liquidity
Some places only accept cash or cash-and-debit only. Keeping money in your checking account ensures you're always ready for these picky vendors, especially if your savings and checking are at different banks.
While one to two months' worth of spending in your checking account might seem arbitrary, it's usually enough to avoid frequent transfers and prevent overdrafts.
Why you shouldn't keep all your money in a checking account
Checking accounts are transactional accounts where you keep money you may need in the near future. They also aren't a good place to store all your cash for these reasons:
- Low interest rates: Even the very best checking account pays less in interest than an online savings account or money market account. You want to keep most of your cash where it earns the most interest.
- Theft risk: Money you keep in your checking account can be easily accessed via a debit card. If your card is lost or stolen, your account could be wiped out by unauthorized purchases or ATM withdrawals.
- Transfer limits: Since some banks restrict savings accounts to six transactions a month, they aren't practical for people who need to pay bills or make debit card purchases.
- Keeping track of savings: Mixing money that you need for day-to-day transactions with savings can make it harder to keep track of how much is in your emergency fund, as well as how much you have saved for other goals.
Bottom line
Like many aspects of your financial life, it's about avoiding extremes. Don't stress whether you want to keep a checking account balance of one month's expenses vs. three month's expenses. But don't keep all your money in a checking account when it could be earning interest elsewhere.
The Ascent's best checking accounts
Don't get caught paying nuisance checking account fees. Check out The Ascent's top checking account picks to open a fee-free checking account that earns a high interest rate.
Best Checking Accounts
FAQs
The median balance of transaction accounts (which includes both checking and savings accounts) was about $5,300, according to the 2019 Federal Reserve Board Survey of Consumer Finances. Using the median, or middle number, gives you a more accurate picture of typical savings than the average. The average household savings in transaction accounts was $41,600 in the same survey, but the number is likely skewed by a small number of super savers.
Money in a checking account is FDIC insured for up to $250,000 per deposit, per institution, per ownership category, so you don't have to worry about losing money if your bank fails. A bigger risk is that when you pay with a debit card, which is usually linked to your checking account, you get fewer protections against fraudulent activity than you get with a credit card.
Sometimes, but not always. Among checking accounts that do pay interest, the annual percentage yield (APY) is much lower than you'd get with a savings account.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
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