Many Americans only keep a few hundred dollars in their checking accounts, causing overdraft fees due to mistaken payments to become a common problem. So, how much cash should you keep in your bank checking account?
A checking account is a type of account used for daily transactions. There are several methods to withdraw, deposit, and use funds in a checking account: debit cards, paper checks, direct deposits, bill pay. If you need cash, you can use a debit card to withdraw from an ATM.
Almost every household or individual will have at least one checking account.
CNBC financial website reports that financial planners typically recommend keeping enough funds in a checking account to cover one month of bills and leaving some buffer funds for unforeseen needs. But you certainly do not want to keep too much cash in your checking account to miss out on interest from high-yield savings accounts, or make your funds more vulnerable to fraud.
Pennsylvania registered financial planner Jessica Goedtel told CNBC, “I encourage people to keep one month’s expenses in their checking account, especially when they are not closely monitoring cash flow.”
She added, however, that “checking accounts typically lack the protection of credit cards,” meaning if your card is stolen, “funds may be harder to recover.” She emphasized, therefore, it’s best not to hoard cash in your checking account.
New Jersey certified retirement planning adviser Gregory Guenther suggests that the balance of a checking account should be enough to cover one or two weeks of bills.
“The right balance in a checking account is not only about the amount, but also about your emotions,” he said. “Too little, and you’ll be anxious every time you swipe your card; too much, and you’ll miss out on the growth opportunity of high-yield accounts. The optimal balance varies from person to person, but it should allow you to make purchases without constantly checking your balance before buying groceries.”
While maintaining a healthy balance in a checking account can help you avoid overdraft fees, it cannot replace an emergency savings fund.
An emergency fund is mainly used to handle significant unexpected expenses, such as medical bills or unemployment. Financial planners typically recommend storing funds equivalent to three to six months’ worth of basic living expenses in a separate, easily accessible account, such as a high-yield savings account. This way, you can access the funds whenever you need them, unlike stocks or retirement accounts, which are not as easily liquidated.
Six months’ savings might sound like a lot, but consider it as a gradual accumulation goal. Any money you can save will come in handy in emergencies.
Guenther stated that an emergency fund gives you leeway to deal with unexpected situations, allowing your checking account to fulfill its primary function – handling day-to-day cash flow.