Tag: checking accounts

How Much Cash Should You Have in Your Checking Account?

One question I often get asked is, “how much should I keep in my checking account?” Magic numbers are hard to come by when it comes to personal finance and this question is no different. If you read an article or have a professional who gives you a one-size-fits-all solution, it’s probably a good idea to get a second opinion. Personal finance is meant to be personal,?after all. So if there’s no magic number, how do you figure out what’s right for you?

What’s so bad about leaving all my cash in my checking account anyway?

Your checking account was intended to keep the cash you need to cover your day to day spending and really nothing more. The average checking account pays 0.05% in interest because there is an expectation that the funds in this account won’t be there for very long. So this means if you are stashing your extra cash in a checking account at the average interest rate, you will earn $4 on a balance of $10,000 after one year. Oof.

Not only is that return disappointing on its own, it also will not keep up with the average inflation rate in the U.S. This means that your money can actually lose some of its purchasing power because prices are going up faster than your money is growing in your checking account. So rather than losing out to inflation, it may be time to consider putting your extra cash to work for you.

Related: This Checking Accounts Pays 1% and Helps the Planet

How much is too much?

Despite the low interest rates on checking accounts, it’s still important to have some extra cash as a buffer. On average, the equivalent of two to four weeks worth of spending money in your checking account is enough to cover any surprises without overdoing it. This can help avoid overdraft fees, cover scheduled automatic payments, and maybe even pay the rent if it’s due a few days before your next paycheck hits your bank account.

In order to figure out the exact right number for you, consider your paycheck, monthly bills and your spending habits. How often do you get paid in an average month? How regular is your spending? Do you often find yourself coming up short every month? Despite the fear of sounding like a broken record here, remember your finances are personal!

If you have a steady paycheck twice a month and your bills are fairly regular, you may feel perfectly comfortable with only two weeks worth of spending in your checking account. However, if you are paid monthly, have lumpy income from freelance gigs, or have any other special circumstances, a month’s worth of spending (or even more!), might make you sleep a little better at night.

Determine your own checking account threshold based on your situation and stick to it. Anything beyond this would likely benefit you more if you put it to work somewhere other than your checking account.

So, what should I do with my extra cash?

There are a few different options for what to do with any extra cash you’ve been stashing in your checking account. First, tackle any high-interest rate debt you may be carrying (this means debt with an interest rate in the double digits). There’s no reason to hesitate to repay your credit card balance and save big on interest payments in order to keep extra cash in your checking account earning next to nothing.

Next, make sure there is enough in your savings account to cover any unexpected expenses or an emergency. Also, for the same reasons we’ve already talked about, make sure that your savings account has a reasonable interest rate (over 1%). A typical emergency fund has enough to cover three to six months of expenses.

Related content: How to Build An Emergency Fund

Beyond paying down debt and building your emergency fund, figure out your next goal for your money. Perhaps this is increasing your retirement savings in a Roth IRA or opening your first brokerage account to start investing for a future home purchase.

If you are new to investing and feel a bit intimidated, you can try an online roboadvisor, like WealthSimple, Betterment or Wealthfont, who can do some of the heavy lifting for you to help you get started. We even found roboadvisors who offer sustainable investing options, so that you can grow your money and have positive impact in the world.

Related content: 4 Ways to Make Real Money with Sustainable Investing

The bottom line:

Although your checking account can feel like a safe haven for cash, don’t be afraid to try something new. You can still maintain a buffer in your account to avoid the anxiety of feeling like you’re living paycheck-to-paycheck. Whatever you decide to do with your excess funds, you will likely see much greater returns than your checking account interest rate can ever provide.

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