How Much Money Should I Keep in My Checking Account?
If we consider banking, we often come across different types of accounts. All of these serve us in different ways. However, it is important to keep the right balance between the money you keep in your account. We will be discussing checking account in this article and how much should we keep in it.
But before we move forward, let's recall all the different types of bank accounts and the services they are giving us.
- Savings Account
A saving account is the one that consumers use to put aside extra money to be used in the future or during emergency situations. It keeps the savings and the on-going expenses separate.
- Money Market Account
A money market account provides limited check related privileges and collects greater interest than the savings or checking account. However, it also gives out better profits and is best for people who want to earn higher interest rates.
- Retirement Account
Retirement accounts are special types of accounts that offer relaxation in the payment of taxes. Its main aim is to keep some money separate to be used after retirement.
- Certificate of Deposit
These certificates help you save money for a definite period of time - and withdraw it after that period. If you invest in a long-term plan, you will receive interest at a higher rate and vice versa.
- Checking Account
Your checking account is the financial touchpoint you need to come around in your everyday life. It is where you get the payments, pay through it, and use it for all sorts of transactions - be it for shopping or working!
Just as keeping too little in your checking account is not a good idea, having too much is worse. Wondering how? Well, if you keep very little money in your checking account, there is a fair chance that you run short of balance - and have trouble paying your bills. This can lead to an extra overdraft fee that you’ll be liable to pay.
On the other hand, if you keep too much in your checking account and don’t even use it. You are only obtusely missing out on the opportunities to grow your money in various ways.
How much should I have in my checking account?
Although it’s an individual choice, experts recommend that you keep expenses sufficient for the coming three to five weeks in your checking account. However, the exact count depends on you.
Some people may want to keep more in their checking account - just to be on the safe side. At the same time, others tend to keep just the sufficiently right amount that can pay for the following expenses easily and still leave something in your checking account.
- Everyday expenses for the whole month such as groceries, food, and fuel.
- Utility bills, phone bills, rent, or mortgage expenses
- Minimum balance requirement of the bank you have your checking account with
- Extra money to prevent over-drafting from your account
Why do I need that much in my checking account?
The main rationale for keeping three to five weeks’ worth of expenses is that’s just right - neither too little nor too much.
It so happens that if you run short of money in your checking account, you have to pay an overdraft fee. Your bank may charge you a heavy fee that you must avoid at any cost. Thus, it’s important to keep your checking account limits in consideration.
How do I calculate the right amount for my checking account?
Calculating the right amount for your checking account is no rocket science - instead, it includes simple maths and a list of expenses.
First thing first, make a list of all the expenses for a month. This must include everything like your bills, rentals, mortgage, food expenses, fuel expenses, groceries, etc. To this amount, add the minimum balance requirement as set by your bank. Now give yourself a bit of relief by adding some extra amount to rule out the possibility of over-drafting.
You can calculate this number manually through the activity of your checking account - or alternatively, use a budgeting tool. In this way, you can categorize payments and enhance the visibility of your spending.
Is it advisable to have too much cash in your checking account?
Do you have more than enough money in your checking account and don’t know what to do next? Well, put it to work! Now you must be wondering how we can put our money to work, right?
Consider investing the excess money in financial investing goals so that you do not suffer from the effects of inflation. This investment might help you pay your debts faster or help you after your retirement.
Where can I invest the extra cash?
You can withdraw the extra cash from your checking account and invest it in your saving accounts. A high yield savings account can give you a significant annual yield at the end of every year.
Alternatively, you can deposit the money in a money market account that pays higher interest rates—thereby increasing your profit ratio.
A certificate of Deposit is another way to manage your extra savings. It provides you profit or interest after a fixed period of time. If you go by the general rule, the longer terms usually give out more interest rate.
An individual retirement arrangement or IRA is an account that allows you to keep your money for retirement. When you retire, you can withdraw the money without having to pay the tax for it. However, if you withdraw it before the age of retirement, you will be liable to pay a 10% penalty in addition to the tax for the withdrawn amount.
Your Checking Account is the most used account of all. Hence, it is important to keep it well managed in terms of expenses. This includes both the incomes and expenses. Keep the right amount in your checking, saving, CD, and retirement account as per your requirement can help you save a lot. Moreover, you can earn a good amount of interest as well.
For any financial advice, you should seek assistance from a professional who would help you to keep your money in the proper place - and more importantly, keep it working!
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