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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.
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:
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.
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.
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.
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.
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:
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.
Here are some other questions we've answered:
Don't get caught paying nuisance checking account fees. Check out The Ascent's top checking account picks to open a fee-free checking account that earns a high interest rate.
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