How Much Money Should You Keep in Checking? Here's the Sweet Spot
KEY POINTS
- Expert opinions don't matter much if you don't have the cash you need to fund your checking account.
- In general, it's a good idea to keep a big enough balance to cover one to two months' of expenses.
- Consider switching banks if your current one doesn't allow you to link accounts for overdraft protection.
How great is it to look at your checking account balance and see more money than you need for bills that month? As lovely as it may feel, there's little reason to keep more than you need in checking. In fact, it's costing you money.
Here, we'll look at how you can discover the sweet spot -- the amount of money that will prevent overdrafts while also freeing up your excess cash to earn interest.
How much does the average person have in checking?
Last year, CNBC and Dynata Banking Behaviors conducted a survey. It found that 27% of Americans have less than $500 in checking, 11% carry a balance between $500 and $999, and 23% have between $1,000 and $4,999.
However, a quick Google search found about 100 dramatically different answers to this question. There's no consensus among banking officials, so it's essential that you figure out what's right for you and stick with that number.
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The rule of thumb
The general rule of thumb is to keep enough money in your checking account to cover one to two months' living expenses. Coming up with that number is as easy as making a list of your monthly payments and adding them together. Then, multiply that number by two.
Here's why you might want to aim for this target:
- No more overdrafts: It's difficult to remember when irregular bills, such as HOA fees or property taxes, come due. Having more than you need to get through the month leaves you with enough to cover unexpected expenses and avoid overdrafting your account. This is particularly true if your payments are set up to auto-pay.
- Helps you avoid minimum balance requirements: Some banks still have old-fashioned minimum balance requirements that charge a fee each time your checking account drops below a specific threshold.
- Reduces the need to hover over your account: Knowing you have enough to cover two months' worth of bills means you don't have to constantly worry about whether you have enough to pay bills or cover an unexpected debit.
If you can't keep two months' worth of bills in checking
Not everyone can sock two months' worth of living expenses in a checking account. Maybe you're not earning much money, lost your job, or live in a high-cost-of-living area. Whatever the reason, most of us have been there at one time or another.
The answer may be to keep enough in checking to cover two weeks' worth of expenses or even just one week's worth, plus a 25% "pad" for good measure. Let's say your weekly expenses are $500. Aim to keep $1,000 in your checking account. If that's not possible, aim for $625. That's $500 to cover your expenses and 25% ($125) in case the unexpected happens.
Regardless of your current situation, you undoubtedly have goals. As you work toward those goals, try adding a little more each week to your bank account. Even if it's just coins you throw into a bowl at the end of each day, every little bit helps.
If your bank allows you to link overdraft protection
If you're banking with a financial institution that doesn't seem to realize we're living in the 21st century, it may be time to switch banks. Many banks and credit unions now allow you to link your checking account to another account type, like a savings account, money market account (MMA), or even a credit card.
If a debit hits your checking account but there's not enough money to cover the expense, the bank will pull the money from one of your linked sources. Even better, some of the best financial institutions don't charge a fee for the service. That's peace of mind.
Reminder: It's essential to shop around for a bank or credit union. Each has its own set of rules, and some are simply more consumer-friendly. Before opening a bank account, ask a customer service rep hard questions, like how the bank handles overdrafts.
Only you know how much money you have coming in to pay expenses. The point is to keep enough money in your checking account to cover upcoming bills, plus 25% to 30% extra to cover unexpected events. Whether you can cover one week's expenses or two months' worth depends on your financial situation and is likely to change over time.
Once you've done what you can with checking, it's time to think about places to put additional funds that earn you money. Read our guide to where you park your cash to find out more.
Our Research Expert
Dana is a full-time personal finance writer, with more than two decades of experience. Her focus is on helping readers feel less alone as they navigate their personal finances and offering actionable insights.
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. Motley Fool Money does not cover all offers on the market. Motley Fool Money is 100% owned and operated by The Motley Fool. Our knowledgeable team of personal finance editors and analysts are employed by The Motley Fool and held to the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.