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How Much Money to Keep in Your Savings Account vs. Your Checking Account
The ideal target minimum is 3-4 months worth of operating expenses in your checking account and 3-4 months worth of cash on top of that in your savings account.
| Read Time: 7 minutes
Important to Know
- Set Up Checking & Savings Accounts
- Build a Budget
- Monitor Cash In vs. Expenses Out
- If 1-2 months or 4-6 months works better for you, great. Do that.
Why? Because according to employment experts and job-related websites, the average time it takes for someone to find a new job in 2022 is between 5-6 months.
By aiming for 6-8 months worth of money in your two primary accounts, you have effectively insulated yourself against the loss of a job. In essence, you’ve created a working emergency fund that is separate from your actual emergency fund (which you should keep).
Large financial publishers such as NerdWallet suggest keeping 1-2 months of expenses in your checking account along with a 30% buffer because anything more means that you’re, “missing out on higher returns in a savings or retirement account.”
However, we disagree with that. 1-2 months worth of expenses leaves little room for error and worse, emergency. People are human and make mistakes. We will readily admit that we’ve made a mistake or two while keeping our check register up to date over the years.
We will also admit to having to call in a financial favor from a family member because an unexpected purchase came up during a weekend and we didn’t have the opportunity to rebalance our bank accounts. Yes, online banking has alleviated some of these prior problems, but while our example happened to us in years past, that doesn’t mean that personal finance problems don’t exist anymore.
The Popularity of Checking & Savings Accounts
A study from the Federal Reserve was published in September of 2020 that stated, “Transaction accounts—which include checking, savings, money market, call accounts, and prepaid debit cards—remained the most commonly held type of financial asset in 2019, with an ownership rate of more than 98 percent.”
In short, the information in this article applies to 98% of adults in the United States. Chime, a financial tech company that is trying to improve the way that you bank, dug into the Fed’s research further and noted that Americans, on average, have a, “median balance of $5,300” in these types of accounts.
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Why 3-4 Months of Expenses is Better
Banking is chock full of fees. They’re not necessarily hidden fees, but they don’t tend to stay top of mind. And banks know this, which is why they charge them. After all, banks and other financial institutions are not charities.
That is why we recommend 3-4 months worth of everyday expenses instead of 1-2. While everyone’s financial goals are different, almost everyone could benefit from a larger buffer in their day-to-day banking accounts against monthly maintenance fees as well as overdraft fees.
But monthly maintenance fees? That’s right, many checking accounts have minimum balance requirements. Rome wasn’t built in a day, and Las Vegas wasn’t built on the wallets of winners, just as banks weren’t built on handing out free financial products. So, keeping a slightly higher checking account balance is an easy way to prevent modest fees from eating away at your growing success.
Start By Creating a Budget
The first rule of sound personal finance is to establish a budget. This can be as simple as a one page spreadsheet that tracks living expenses against your company’s direct deposit amount that arrives in your account every 1, 2 or 4 times per month.
A good rule of thumb is to make sure your credit cards are paid off in full each month. Why? Because you won’t outrun a 16.27% APR, the average APR in the third quarter of 2022 according to LendingTree, in the market by keeping a balance on your credit card. Put in other terms, what good is extra cash in your checking or savings if you’re bleeding it to your Amex, Mastercard or Visa?
Same goes for retirement accounts. Your left hand can’t be paying future you at a rate of 5-8%, the average annual return based on market conditions according to SmartAsset, if your right hand is dealing 16.27% back to your credit card company. Always pay off high APR debt as fast as you can.
Track your expenses over time. This will answer the question of “what is enough money” by showing you the amount of money going in and out each month. Also, take note of the types of expenses and create categories. One easy way to save money is to find out how much money you spend on takeout or entertainment each month, and start to trim the fat.
What to Do With Extra Money
You’re only in a position to consider what to do with extra money once you’ve established a rock solid budget and are keeping good records. Moving beyond a basic budget often requires some personal investigation into financial instruments with expected (well, hoped for) returns. Extra money can be invested in bonds and stocks. For parents, it can also be moved into college savings plans for their children, such as a 529 Plan. It can also be used for over-the-counter financial products like Money Market Accounts and CDs at your local bank or credit union.
You should also consult your financial advisor before moving cash into any financial instrument, investment account or opportunity.
- Bonds
- Certificate of Deposit (CD)
- Money Market Account (MMA/MMDA)
- Real Estate
- Stock(s)
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What If My Financial Advisor Is My Parent?
Consult them before investing your money (which started as your time). They may not know how much money should go into your IRA to maximize your tax efficiency, and they may not know the hottest stock (or cryptocurrency or NFT for that matter), but they had to manage their own savings and their own checking accounts for years while you were growing up, so it’s a good place to start.
If your parents are financial experts, all the better.
How to Take Action
- Start by Earning Money. If it feels obvious, good. But sometimes it needs to be said.
- Set up Bank Accounts. If you don’t already have a Savings Account and a Checking Account, do some research (online, with family and friends, etc.) and choose a bank, local, regional or national, and set up those two accounts. Look for zero fee checking accounts to start with. Also, look for a “Member FDIC” sticker posted in the bank, or FDIC logo if you’re looking into online savings accounts. FDIC insured banks add a layer of protection to your assets.
- Create a Budget. Once again, a budget goes a long way toward helping you determine what your monthly expenses are and how to properly balance the leftover cash into each account.
- Set a Goal. Monitor your expenses for a few months to reach a number. That number, which is different for everyone based on lifestyle, location (cost of living), need, and a number of other factors, is what allows people to know how much money they should keep in their checking and savings accounts.
- Invest When You Can. When your checking account and your savings account both have 3-4 months worth of cash in them, you can begin to look into other investments. That term is wide open though. Sure, you can move cash into a High-Yield Savings Account. But you can also invest stocks and bonds. Or, invest in yourself via education or a hobby, as some money should be set aside your self-improvement.
What’s Comes Next
You can research the best checking accounts with the highest Annual Percentage Yield (APY) until the cows come home. But withdrawals that go over your limits because of unexpected expenses will always cost you more in the long run.
Focus on earning and creating a budget before moving on to the need for higher interest rate accounts, because the cash in your checking and in your savings needs to come first. After all, it has the most impact on your day-to-day living expenses.