It’s a question everyone is probably wondering, from the billionaire to the person living paycheck to paycheck: How much money should I keep in my checking account?
Of course, if you’re a billionaire, deciding what to leave in your checking account is more of a “fun” academic exercise. If you’re constantly struggling with cash flow, this is a much more important and non-frivolous question.
According to the (released October 2023), the average household’s current account balance was $2,800. That said, there’s no hard and fast rule about how much money you should keep in your checking account, so if you’re trying to determine a dollar amount, don’t pay attention to what other households are doing. Instead, pay attention to your pile of monthly bills.
How much money should you keep in your checking account, and why?
Most experts recommend keeping one to two months’ worth of expenses in your checking account at all times.
For example, let’s say you have $5,000 in bills every month. That means you want to consistently keep $5,000 to $10,000 in your checking account.
Why? It’s a good idea to keep a cash buffer in your checking account to avoid accidental overdrafts. For example, if you’ve been paying a lot of bills via automatic withdrawal, you don’t want to wake up one morning and find that your checking account is negative, and you now have a handful.
At the same time, you can also use your checking account to make purchases at the grocery store, clothing store, movie theater, etc. As long as there is more than enough money in your checking account to cover your expenses, you can pay bills and live your life. without having to worry about your balance. Of course, that’s not always possible, but it should be the goal.
While it’s good to maintain a healthy cash buffer, it’s also possible to keep too much money in your checking account. In most cases, checking accounts do not pay high interest rates. So your extra money wouldn’t just sit in the bank without growing; you might even lose money over time due to inflation.
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If you’re lucky enough to have more money than you need in your checking account, consider putting extra money in the following places:
High-yield savings account (HYSA)
If your checking account consistently has enough to pay your bills and your living expenses, that’s fantastic. But would you be in good shape if you suddenly needed new tires? Or a new car? Or if you had to pay to have your daughter’s wisdom teeth removed? What if your pet gets sick? What if you lose your job?
You get the idea. With a savings account you have the opportunity to regularly park extra money for when you need it. However, according to the Federal Deposit Insurance Corporation (FDIC), the average interest rate on savings accounts is only 0.45%.
The good news: There are many financial institutions – especially online banks – that offer high-yield savings accounts that offer as much as . These accounts allow you to save for life’s unknowns while earning generous interest and helping your savings grow.
Deposit Certificate (CD)
In many cases, a CD can earn you as much interest as a savings account offers (if not more). These accounts are especially useful if you want to save money for major expenses, such as a wedding, a one-time vacation, or a payment for your child’s college tuition.
With CDs, you are expected to keep your money on deposit for a certain period of time in exchange for a higher interest rate. CD terms can vary from several months to several years. Once (when the period ends), you can get your money back, plus the interest earned.
If you need the money before the account matures, you can get it, but you will pay an early withdrawal penalty. The exception is if you put your money in a , which generally has a lower interest rate than the .
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Money Market Account (MMA)
A money market account (not to be confused with a ) is like a hybrid savings/checking account. That means you deposit savings into a money market account (as you would for a savings account or CD), but you can often also write checks and pay for items with a debit card, as you would with a checking account. The interest rate is also often comparable to that of a high-yield savings account.
On the other hand, you may need to maintain a high minimum balance to earn the highest advertised rate. And there may be restrictions on how often you can withdraw money.
You’re probably a good candidate for a money market account if you plan to carry a large balance and earn a competitive interest rate, but you also want the flexibility of writing a check or paying bills with a debit card if that is needed. .
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Investments
If you want to grow your wealth and save for long-term goals like retirement, you’re probably better off putting extra money into investments.
For example, if your checking and high-yield savings accounts are in good shape, then you really should redirect any extra money to a tax-advantaged retirement plan like a 401(k) or IRA. Your future self will thank you.
Another option is to invest through a 529 plan, an investment account used to pay for eligible education expenses. If you have children and you hope they will one day go to college, this can be an excellent place to make some extra money.
While the above accounts offer tax benefits, they may limit the types of investments you can choose from and how much you can contribute each year. If you are interested in investing extra money in stocks, commodities, crypto, real estate, etc., you can do so through an investment account.
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