Opening a checking account is a universal first step toward financial well-being, and most Americans have at least one operational by the age of 18.
Your checking account is the engine that keeps your financial life churning along, from receiving direct deposits to spending on daily needs and monthly bills. Checking accounts never sleep, because you never know when you’ll need to access that cash!
This leads us to a common question that never quite seems to be answered: exactly how much money should you keep in your bank account at a given time, and how do you even calculate that number?
Some surveys say $2,900 is the average, while others suggest that you only need just enough money to cover a few weeks' worth of expenses. You may want emergency savings for unexpected expenses, or you may want extra money that can cover a few months’ worth of living expenses. Everyone has different rules of thumb depending on their own goals and risk tolerance, so you are ultimately the one who must decide, given all the info.
That’s just what we aim to do with this article: lay out the facts about checking accounts and best practices, so that you can keep the ideal amount on hand for your particular lifestyle.
As your finances evolve over time, these numbers will shift, so keep these principles in mind as you navigate the long road ahead.
There’s no point in just throwing out a few numbers and telling you how much money should be kept in checking. Personal finance practices are most effective when they’re understood on a deeper level, and this includes finding out the “why” behind it all.
With respect to checking accounts, let’s first figure out what a checking account meant to help us accomplish in our daily lives.
Primarily, a checking account is all about transaction volume, allowing you to execute purchases and withdrawals from a financial institution to meet your needs with no external limitations (aside from the amount of cash available).
Next, your checking account balance is meant to be quick and accessible, whether that means withdrawing bills from an ATM, swiping your debit card at a restaurant, filling up your tank with gas, or paying the rent at the end of the month.
Finally, checking is the ideal account in which to keep instant-access emergency funds, according to many personal finance experts. You never know when you might need that extra cash to pay for a flight, hotel, or medical bills, and that money should be available to use in a flash.
Savings, as we’ll discuss further, is a separate type of account with unique attributes as well. For now, we know what checking accounts are meant to do, and why they matter.
We know what makes checking accounts unique and useful, so let’s crunch the numbers to determine the ideal amount of money to keep.
Start by looking at your monthly expenses and piece together a rough estimate for what you spend from your checking account in a four-week time frame.
This might include gas, groceries, a few meals on the go, rent payments, car payments, and the occasional convenience or entertainment purchase. These numbers will vary widely depending on where you live, if you have dependents, and the kind of everyday expenses you have.
Once you find that number, add another thirty percent (roughly a third of that total) on top of the expenditure.
For example, if your number is $3,000 an additional $1,000 is recommended to keep in savings. That equates to a $4,000 total that you should keep in checking, if possible.
It seems like a lot, but when you run the numbers, it’s the smart approach that will keep you a cut above the “paycheck to paycheck” lifestyle that so many Americans find themselves in. That extra 30% cushion makes you far more resilient to financial bumps in the road, or the proverbial “rainy day” that we all keep on the radar — you’ll have months of expenses covered.
If that magic number seems just out of reach, guess what: you have an attainable and tangible financial goal to reach for in the coming months. A bit of extra saving, budgeting, and some timely Income Boosters from Steady can help you achieve your income goals sooner than you think!
We’ve simplified things with an approximate number you can calculate in a few minutes, but what if you need to keep more in your checking account to stay safe?
After all, lifestyles vary greatly between individuals and families, and there is never a one-size-fits-all financial equation for everyone.
Knowing this, let’s outline a few additional factors that may lead you to keep more in your checking account, just to be sure.
Spend a lot of time on the road, including at airports and hotels? Your checking account gets a lot of extra use that most stay-at-home folks don’t realize.
It’s not just the airfare and booking fees, but also the meals and snacks, the rideshares, and all the extra purchases that keep you moving in the world of business.
The last thing you want is to be hit with an overdraft fee when meeting with clients, so an additional 20% to 30% should be tacked on to your magic number calculated above.
Parents know that when kids enter the equation, expenses can be unpredictable. That’s why people with dependents (young and old), should aim to boost their checking account number by at least another 20% above the norm.
Medical bills like copays and deductibles are the highest priority, since you never want to roll the dice when it comes to children’s health.
On top of that, you never know when kids might need new clothes, supplies for school, or a new toy that everyone is talking about. These costs seem small on an individual basis, but they add up quickly, especially when you have multiple children at home.
After the events of 2020, everyone is a bit more cautious about emergency planning, which might necessitate more money kept in checking than before.
Gas prices are on the rise, and so are groceries, not to mention rent payments and utilities. What’s more disconcerting is the instability that seems to underpin these inflationary trends, and there’s no telling when economic turbulence may strike again.
Being worried or afraid won’t change outcomes, of course. That is why you should plan ahead and pad your checking account for quick-access cash, no matter what happens next.
With the gig economy in full swing, more workers are diversifying their income sources and keeping more cash in checking as a result. This isn’t a bad problem to have, of course, and there’s nothing wrong with using checking as a gateway for earnings.
However, you should remember your upper limit and that “magic number” discussed earlier: there is such thing as too much money in a checking account if your aim is to maximize financial leverage in your favor.
Even the best checking accounts have their limitations. Let’s talk about what you should do when you exceed the ideal checking limit and start to think bigger with your finances.
When your checking needs are fulfilled from month to month, look to open a savings account with a higher interest rate. A high-yield savings account will let you see your wealth more clearly as it accumulates over time, and will position you for more earnings in the long run.
The difficult part is leaving that money alone, or using it only when you meet the conditions of your own goals. Saving up for a car down payment is a good example, since you’ll know exactly how much is needed.
In addition to a savings account, consider opening an investment portfolio that allows you to buy stocks, bonds, and other securities like ETFs. An investment account may be slightly more risky than a high-yield savings fund, but the upside is much greater if you stay consistent over time.
There are so many resources to help you start on your investing journey, and you don’t need much to begin. Financial advisors will be able to help you get started whether you’re investing for a retirement account like an IRA, or speculating on crypto.
Between checking, savings, investing, and multiple income sources, you’ll need a one-stop app to manage all your income with full transparency. That’s exactly what Steady helps you do, along with offering other income resources including granting extra cash rewards when you engage with new and better financial products.
Steady allows you to get a complete, top-down view of your finances so that you never feel overwhelmed by your accounts and you can always personalize when, how, and how much you earn. There is no better way to make sure you have the right amount in checking, while also staying on track with savings and other goals.
Each financial service is meant to be used a certain way, but many people misuse them and miss out on key benefits. Checking is a great place to start, so apply what you’ve learned in this guide and start moving towards better financial health today.