How Much Money to Keep in Your Checking Account
There are many factors to consider when determining how much money to keep in your checking account.
First, there’s what you plan to use your checking account for. If you have only one checking account, you may use it to pay bills and expenses. On the other hand, you may set up one checking account just for bills and another for expenses.
Second, you’ll need to determine a dollar amount you’d like to maintain. For some people, this might mean an amount unrelated to their expenses, such as $5,000.
However, it may be best to keep about two months’ worth of living expenses in your checking account, plus an additional 25% to 30% on top of your monthly expenses, according to Brian Milton, head of personal banking deposits at the Federal Bank.
“Having a cushion will help you avoid overdrawing your checking account and incurring costly fees, so it’s best to have a buffer,” Milton said.
The typical overdraft fee is $31, making it important to know how to budget your checking account to avoid those fees. This ties back to how you plan your money for the month and how often you get paid.
Note: Choosing your bank’s overdraft protection can help you avoid overdraft fees, although you may have to pay a fee to transfer money from savings to checking to cover transactions.
Tips for Choosing a Checking Account
If you’re looking for a new checking account, here are some things that the Consumer Financial Protection Bureau recommends you consider when comparing options:
– Checking account fees
– Minimum balance requirements
– Initial deposit required
– Banking services and accessibility (like mobile and online banking)
You should also consider whether you feel more comfortable opening a checking account with a traditional or online bank. Online-only banks do not provide branch access but may charge lower fees for checking accounts. Some online checking accounts, like Ally’s Interest Checking account, also allow you to earn interest on your balance.
According to Shirley Yang, vice president of deposits at Marcus by Goldman Sachs, you should think of the account as a tool for daily operations, whether you choose a traditional or online bank. “People should consider a checking account as a place to keep money that they want to access for typical everyday expenses,” she said.
Consider Using a Credit Card as Well
If you’re worried about incurring overdraft bank fees or not meeting the minimum balance, credit cards can help. For example, using a credit card to pay for daily expenses while keeping your checking account for bills can make it easier to budget your checking account balance and avoid fees.
At the same time, you may be able to earn money-saving rewards like points, cash back, or travel miles by using a credit card.
Note: The key is that using a credit card only saves you money if you avoid paying interest fees. To do that, you’ll need to pay your balance in full each month.
How Much Money to Keep in Your Savings Account
The amount you should keep in your savings account may depend on what you are saving for. If your savings account serves as an emergency fund, for example, you might want a target of three to six months of your expenses. The actual dollar amount will vary based on what your monthly expenses are and how many months you choose to save.
Remember,
The money you save is for emergencies and unexpected expenses, such as if you lose your job or need to pay for car repairs, not for a family vacation or a home renovation project.
On the other hand, the amount of money you should keep in your savings account may depend on the goal you are saving for. For example, if you want to allocate $15,000 for renovating your bathroom, that is the amount you want to have in your savings account. If you are saving for a down payment on a home, you may aim to have at least $10,000 or more.
Note: Remember that the Federal Deposit Insurance Corporation insures individual deposit accounts up to $250,000 across all accounts you own.
Also, remember that money in a savings account is not restricted to withdrawals in the same way as it is from a checking account. Your bank may set a specific number of withdrawals you can make each month. If you exceed that number, your account may be converted to a checking account or closed entirely.
According to Milton, sending excess money to a savings account can also provide protection. “Another reason to keep the rest of your money in a savings account is security,” he said. “Bank tellers, debit cards, and online payment details are all opportunities for fraudsters, and keeping any excess balance in a savings account not only earns extra interest, but it’s also a wise precautionary measure.”
Tips for Choosing a Savings Account
Similar to choosing a checking account, it is important to consider the basics when choosing a savings account:
– The minimum deposit required to open
– Monthly maintenance fees or minimum balance requirements
– Banking products and services
You should also carefully consider the Annual Percentage Yield (APY) the bank offers for savings accounts. The higher the APY, the greater the opportunity for your money to grow over time through the power of compound interest.
Note: While some traditional banks still offer APYs below 0.50%, you may be able to open a high-yield savings account and earn much more on your monthly balance.
Average Balances for Checking and Savings Accounts
It is difficult to determine how much Americans hold in checking accounts and savings accounts. The best available data up to June 2020 comes from the 2017 Consumer Finances Survey conducted by the Federal Reserve. According to this survey, the median amount for all transaction accounts in 2017, including checking, savings, and money market accounts, was $4,500. The average for all transaction accounts was $40,200.
It’s important to remember that these figures do not necessarily represent the cash or funds possessed by unbanked individuals. In 2017, there were 8.4 million unbanked American households, which means they did not have a bank account of any type. Although the Federal Reserve numbers include money stored on prepaid debit cards, those cards may not be used by every unbanked household.
Note: Due to the difficulty in determining average balances for checking and savings accounts, it’s best to use your financial situation and your bank’s fee structures to determine the minimum amount you should keep in your accounts.
Conclusion
Managing your checking and savings accounts wisely can help you stay informed about your finances and avoid unnecessary fees. The target balance amount for each person is different, so what matters is finding the number you feel comfortable with and making it a habit.
Be
Be smart with what you do with extra money (
Source: https://www.thebalancemoney.com/how-much-to-keep-in-checking-and-savings-315474
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