How Much Money Should You Keep in Your Checking Account? Here's the Sweet Spot

The sweet spot for how much to keep in your checking account depends on how much money you spend each month and how hands-on (or off) you are in dealing with your finances. Common financial wisdom says to keep one to two months' worth of living expenses in your checking account, plus a buffer.

The idea is to have enough money to easily cover your bills and any direct debits, even if you forget about a payment. Overdraft fees can be costly and irritating; that's money you could use for other things. Plus, having payments rejected can cause embarrassment and, depending on the bill, ding your credit score.

Perhaps you're wondering why not keep more cash on hand. You can. Just remember that unless it is a high-yield checking account, you won't earn much (or any) interest on your money. Many checking accounts don't pay any interest at all, while top savings accounts are paying annual percentage yields (APYs) of 4% or 5%. Overstacking your checking account could cost you hundreds of dollars.

Keep one to two months of cash in your checking account

Like many financial guidelines, what's important is to find a checking account balance that works for you. To do that, you'll need to look at what you spend each month. If you're not sure, sit down with your recent bank statements and look at your spending.

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Factor in regular costs such as your rent or mortgage payment, utilities, transportation, subscriptions, and groceries. Don't forget about any sneaky annual payments such as insurance. They're the ones that can creep up and send you into the red.

To give you a general idea, we used The Motley Fool Motley Fool Money's research into average spending by age to calculate how much you might need in your checking account.

There's no one-size-fits-all checking account balance

We all manage our money differently, and your checking account balance sweet spot depends on a few factors.

Your minimum balance requirement

Some checking accounts require you to keep a certain balance to avoid monthly maintenance fees. If this is the case, make sure you know how much is needed and build it into your calculations.

Your bank's overdraft policy

Some banks have abolished or drastically reduced their overdraft fees following pressure from consumer groups. Others have a buffer of $50 to $250 so you can overdraw without incurring fees. If you regularly go into the red and are struggling to raise your checking balance, look for an account with favorable overdraft policies.

How stable your income is

Speaking as a freelancer, I tend to keep a little extra money in my checking account in case payments don't come through when I'd hoped. I can move money from savings, but I sleep better knowing I have a buffer. It's a different story if you have a regular job and your paycheck always arrives on time.

How you spend your money

When you're looking at how much you spend, it's also useful to think about how you spend. If your rent and other big payments go out of your account automatically, take that into consideration. If you do your banking manually and check your balance every day, you may not need as much in your account.

Living paycheck to paycheck? You can break the cycle

The trouble with some of these financial rules of thumb -- like maintaining one to two months' worth of money or more in your checking -- is that they don't reflect many people's reality.

Unfortunately, if your paycheck only just covers your bills, the idea of building a balance of over $7,000 may feel overwhelming. Firstly, know that you are not alone. According to a PayrollOrg survey, 78% of Americans live paycheck to paycheck. Secondly, know that there are steps you can take to change your situation.

The most important thing you can do is start somewhere:

• Learn where your money goes. This puts you in the driver's seat and will help you make decisions.
• See where you can make cuts. Even small cuts can add up. If you can shave, say, $20 off your grocery bill, skip a few takeaway coffees, and cancel a couple of subscriptions, that could mean $50 more each month.
• Set aside a small amount each month. Set yourself an achievable goal and start to build your checking balance a little at a time.
• See if you can earn a little extra. If you're able to take on a side hustle or some extra hours at work, it could ease the pressure on your budget.

Bottom line

If you already have a decent chunk of money in your checking account, congratulations! Once you have a balance of one to two months plus a buffer, you can start to put any extra cash toward savings and investments.

If you worry that your checking account balance is not where you want it to be, don't panic. Start by putting even a small amount aside each month, and slowly you will build more financial stability.