It’s essential to keep cash in your checking account, but how much is the right amount? While the number varies based on your personal finances, you can follow some guidelines that help you make the best choice for your own spending habits and potential needs. Here’s a look at how much cash you should keep in your checking account so you know you’re making a wise financial decision.
How Much Cash to Keep in Your Checking
Many people want to know: how much cash should you keep in your checking account? There’s no right answer for everyone, but there probably is a right answer for you. The amount varies based on your income, typical monthly expenses and how much of a cushion you want for unexpected bills.
If you follow a monthly budget, you should already know how much you spend every month. As long as you spend less than you earn every month, your checking account balance should slowly grow in balance, in theory. If you find yourself constantly short on cash, take a hard look at your budget and opportunities to increase your income. Then, make changes so you’re moving in the right direction.
There is no official rule on how much cash to keep in your checking, but I like to keep around four to six weeks of expenses in my checking account. That’s equal to roughly one to one and a half times my monthly budget.
Following that guideline, there’s virtually zero chance of any kind of overdraft, and I’ll be able to cover unexpected costs like an ER visit or minor home repair without dipping into savings.
Projecting Monthly Expenses
If you’re not big on budgeting, you should still take the time to understand your typical monthly spending. Many of my friends in the personal finance blogging community prefer a high-level “spending plan” where they know what they can afford to spend every month based on their projected income and automated savings and investment plan.
If you’re into high-level spending plans, you can look at your most recent bank account statements to see how much you spend in an average month. For more help and better tools, consider an app like Personal Capital that helps you track and understand your monthly cash flow.
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Picking Your Optimal Checking Account Balance
I put all of my spending on a credit card, so I know I’ll almost always have time to move funds into my checking account, even if I have a significant financial emergency. Because checking accounts typically give you little if any interest, it’s also important to avoid over-saving in a checking account. If you keep more than two months’ worth of expenses in checking, consider moving a chunk of that to a high-yield savings account or investment account.
On the flip side, you wouldn’t want to keep too little in your checking account and run into overdrafts. Those can be expensive and are no fun regardless. At my bank, my investment account acts as a free backup in case I overdraft. Many banks offer a similar feature with savings accounts or lines of credit. If you have one of these, and it’s free to use, you can keep an even smaller checking account balance.
That’s why I find the best option for most people is four weeks of expenses at minimum or eight weeks at most. I like to split the difference at around six weeks of expenses, but anywhere in the four-week to eight-week range should keep your finances safe without costing you too much in potential investment or interest earnings.
Fine-Tune Your Cash Flow
If you are in the majority of people who get a regular paycheck with a fairly predictable monthly income, you can get into the weeds of your income and spending plan to fine-tune your cash flow and cash needs.
A checking account acts as your most important financial hub. Like a busy airport, it’s a place that handles all of your financial arrivals (income, paychecks) and departures (expenses, bills). Using automated savings and investments, you can fine-tune your cash flow, so you rarely need to think about your bank accounts. Automatic retirement contributions at work, recurring bank account transfers, recurring investment transfers and auto-pay combine to help you automate and control every dollar that passes through your checking account.
If your bank doesn’t give you these features or charges you any kind of recurring fee, it might be time to rethink your checking account. There’s no reason to stay loyal to a bank that isn’t putting your needs and preferences first! Once you have the best checking account for your needs, you can pick the right balance and move forward with easier financial management.