A recent article by The Wall Street Journal showed that Americans are hoarding a record amount of money in their checking accounts due to fatigue and uncertainty from the pandemic. However, keeping all your money in a checking account isn’t necessarily a good thing.
The question shouldn’t be “How much money can you have in a checking account?” Why? Because there is such a thing as ‘too much’ which leaves you asking, “How much money should I keep in my checking account?” We’re going to tell you!
Why Have a Checking Account?
A checking account serves a few important functions.
- It makes paying bills convenient. Yes, you can take the cash from under your mattress, go to the bank, buy a money order, and send it to the cable company or your credit card company, but it’s so much easier to log into your checking account and pay your bills online or write and mail a paper check.
- Parking your money in a checking account offers certain protections. Keeping and carrying large amounts of cash leaves us vulnerable to theft or accidental loss. Your money is safe from both in your checking account. A checking account provides proof of payment. If your landlord claims you didn’t pay rent last month, you can easily get a copy of the canceled check.
- You can earn a little interest on your money. While checking accounts aren’t known for their generous interest rates, something is better than nothing and nothing is what your money is earning when you stash it at home.
The Formula Preferred by Experts
There is no one size fits all answer to the question of how much money you should keep in your checking account because everyone’s income and expenses are different. But there is a simple formula that will give everyone their ideal number.
Step 1: List all of your monthly expenses. These expenses include things like rent or mortgage payments, utilities, insurance payments, debt payments like credit card minimums, student loan payments, and car payments. Your grocery and gas expenses and miscellaneous expenses like entertainment, personal care, and household items. And, don’t forget variable expenses. These are things such as holiday gifts or travel for vacation. These don’t happen every month but should be budgeted.
Your number doesn’t have to be down to the exact penny, just a pretty good ballpark number. If you don’t know where to start, here are some basics of budgeting your money.
Step 2: Keep at least 2 times your monthly expenses in your checking account. Most financial experts recommend keeping 2 – 2.5 times your monthly expenses in your checking account. Why keep more than needed? An unexpected expense in the middle of the month could really cause problems, so you’ll want to have a little extra buffer in case that should happen.
Here’s an example:
| Monthly Expenses | Good Scenario | Better Scenario |
| $2,500 | $2,500 x 2=$5,000 | $2,500 x 2.5=$6,250 |
An important factor in your number is how often you get paid. The more frequent your paychecks, the smaller the number can be because you have money flowing into your account more often. If you’re only paid once a month, your number will need to be a little higher.
Put the Rest of Your Cash Somewhere More Profitable
The rest of your money should be kept separate from the money you use to pay your monthly expenses. There are a few reasons for this.
Money in your checking account is too easily accessible. That’s a good thing when you need to pay your bills, but when your savings account is too accessible, you can simply spend it by swiping your debit card or making a withdrawal at the ATM. This can prove a little too tempting to spend it on non-essentials.“Wow! Look high my checking account balance is! Time to treat myself!” Keeping the money for your expenses and your savings separate makes it a little less tempting to spend on things we don’t really need.
Your checking account pays little to no interest. You want your extra money to work for you. You can grow your savings faster when you keep it in a high-yield savings account. Many online-only banks offer interest-bearing checking accounts that could also serve as excellent places to store cash. With these and other options, your money won’t simply accumulate — it can grow.
More Choice Than Ever
In the “old days” we were limited to whatever banks were convenient to our homes or places of work. But there are more choices than ever with both brick-and-mortar banks and online banks. And with more choice comes better deals for consumers. Banks are competing for your business so you can shop around to find the best bank with the best terms and rates to meet your needs.
