A checking account is a prerequisite for many aspects of modern life -- utilities, gym memberships, and even other financial accounts like credit cards. But while having a checking account is a given, there isn't a hard rule for how much to keep in checking.
Below, I'll explain the ins and outs of deciding how much to keep in checking without getting too scientific about it.
The right amount of money to keep in a checking account
One helpful rule of thumb is to keep one to two months' worth of spending in your checking account. The rest of your funds should go to savings accounts or retirement and investment accounts. The rationale for this boils down to four simple and straightforward reasons:
1. You'll largely avoid the risk of an overdraft
Even the wealthiest people can slip up and spend more than they have in their checking account. If your checking account balance falls below $0, you'll incur overdraft fees. You could pay $35 or more for every transaction made while your balance is below $0. Some traditional banks can hit you with more than $195 in charges for multiple overdrafts in a single day. Many banks offer overdraft protection, typically for a fee, to protect you from these extra charges.
2. Pre-authorization holds can hurt
Some merchants are notorious for doing "pre-authorization holds" on debit cards. For example, if you use your debit card to buy gas, the gas station may place a hold on your card for up to $100. This reduces your available balance (but not your actual balance) by that amount. When the actual purchase amount clears your account, the gas station will then release the hold.
Pre-authorizations can tie up your money until they are released. They are commonly used by hotels and rental cars, and can tie up your money for days at a time. Preauthorizations can hit your checking account balance. A better option? Use a credit card, especially a travel credit card, rather than a debit card for these payments.
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3. You'll need to meet the minimum balance requirement (and then some)
Most traditional banks require you to maintain a minimum account balance to avoid monthly service charges. These typically range from $100 to $2,500, though most are much closer to the lower end. If your bank has a particularly high minimum balance requirement, you don't want to have to worry about how much to keep in your account. Your priority should be to switch to a no-fee, no-minimum online checking account.
Minimum balances aside, how much money can you have in a checking account? There is no maximum limit, but your checking account balance is only FDIC insured up to $250,000. However, as we'll cover shortly, it makes sense to put extra cash somewhere it will earn interest.
4. Liquidity matters
Most vendors take cash, debit, and/or credit cards. However, a select few are cash-only or cash- and debit-only. Having money in a checking account means you're only an ATM or debit card away from making a purchase with a payment-picky vendor. This is especially important when you keep your savings and checking at different banks, and transfers aren't instantaneous.
Admittedly, one to two months' worth of spending is a somewhat arbitrary amount to keep in a checking account. But it's high enough for most people to go a long time without having to move money between accounts and avoid an overdraft.
If you get paid by direct deposit into a checking account biweekly, keeping a checking account balance of one month's spending will all but guarantee you never overdraft your account.
Why you shouldn't keep all your money in a checking account
In a perfect world, we'd all keep our money in savings accounts and skip the checking account altogether. But because regulations limit savings accounts to six transactions a month, they aren't practical for people who need to pay bills or make debit card purchases.
This is exactly why checking accounts exist: They're transactional accounts where you keep money you may need in the near future. But they aren't a good place to store all your cash for two big reasons:
- Low interest rates: Even the very best checking account pays less in interest than an online savings account or money market account. You want to keep most of your cash where it earns the most interest. A checking account is not that place.
- Theft risk: Though this is a small risk, the reality is that money you keep in your checking account can be easily accessed via a debit card. If your card is lost or stolen, your account could be wiped out by unauthorized purchases or ATM withdrawals. Debit cards have poor consumer protections against fraud. If it takes you too long to realize your account has been compromised, you could be fully responsible for any fraudulent charges. Meanwhile, many credit card issuers offer zero liability for fraudulent transactions. This means you're totally off the hook if someone makes credit card purchases in your name. This is why we advise using credit cards or cash. You may see this as paranoid, but you only need to have your debit card number stolen once to realize how troublesome it can be.
Don't take these reasons to the extreme. I'm not advising you keep your checking account balance at the bare minimum; just keep things in perspective. Like many aspects of your financial life, it's about avoiding extremes. Don't stress whether you want to keep a checking account balance of one month's expenses vs. three month's expenses. But don't keep all your money in a checking account when it could be earning interest elsewhere.
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About the Author
Kevin Payne is a personal finance writer specializing in credit cards, banking and student loans. He is a regular contributor to Forbes, Student Loan Planner, and FinanceBuzz. Kevin is the budget and family travel expert behind FamilyMoneyAdventure.com. He lives in Cleveland, Ohio with his wife and four kids.
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