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Having a chunk of money in your checking account can feel good, especially if you’ve ever been broke. However, there is such a thing as having too much money in your account. Let’s say you have $5,000 in your account but are suddenly abducted by aliens (hey, the podcasts I listen to tell me it could happen). You reappear one year later and your $5,000 is still in the account. The problem is that $5,000 can buy less due to inflation.
So, what’s the right number? Let’s dive into your options.
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If your bank requires a minimum balance
Given the number of brick-and-mortar and online banks we have available to us, it’s hard to imagine that anyone still deposits their money into a financial institution requiring a minimum balance — but people do every day.
The average fee for dropping below the minimum balance ranges from $4 to $25. While most banks have a workaround (like opening a savings account with the same bank or opting for direct deposit), it’s still a fee that nibbles away at your finances.
In this case, it makes sense to keep at least the minimum required balance in the account at all times, even if it’s a checking account you rarely (if ever) use. There’s no reason to waste money on fees.
But if, like most Americans, you use your checking account to pay bills, you’re going to need more.
Building a buffer
Another option is to leave enough in your checking account to cover all expected bills for the month, plus enough to cover any surprises.
For example, if your monthly bills add up to $3,500, you know $3,500 isi the minimum you’ll need in the account. But what if an expense you’ve forgotten about comes through or a bill is higher than you expected? You might want to add an extra $1,000 to cover the “what ifs.”
What you’re trying to avoid is a non-sufficient funds situation. Say you make a quick run to the grocery store and spend $125, but there’s only $110 in your checking account. Not only will your bank hit you with a non-sufficient fund fee, but you’re also likely to face a fee from the grocery store. In short, it can get expensive.
Each state or U.S. territory sets the maximum amount financial institutions in that location can charge for non-sufficient funds. It ranges from $10 in Puerto Rico to $50 in Virginia.
Fortunately, most banks offer overdraft protection where you link one account to another. For example, you may link your savings account to checking. If you face a non-sufficient funds situation, the bank will automatically transfer the money needed to cover the transaction from your linked savings account. Some banks charge a fee for each transfer, but it’s likely to be less than you would pay in non-sufficient fund fees.
The sweet spot
One rule of thumb that may offer peace of mind is to keep enough in your checking account to cover one to two months’ worth of bills. Again, if any money you would normally spend over the course a month amounts to $3,500, that means aiming for $7,000 in checking. With two months tucked away, you know that your “regular” bills will be paid as well as any surprises that may come through.
There’s another advantage to having enough money to cover two months’ worth of bills in your account. Imagine you suddenly become ill or are injured in a car accident and in no condition to ensure bills are paid. Unless you have someone doing it for you, some bills may go unpaid, negatively affecting your credit score.
While having that much money in your checking account may seem excessive, it buys you time to get back on your feet and take control of your finances.
Once you deposit an amount that’s just right for you in checking, it’s time to put any additional money to work in a high-yield savings account, money market account (MMA), or certificate of deposit (CD). Now is a great time to watch your money grow.
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