How Much Money Should You Keep in Your Checking Account? Here's the Sweet Spot

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It's no secret that deposit accounts like certificates of deposit (CDs), high-yield savings accounts, and money market accounts (MMAs) have been the darlings of the bank industry in recent months. After all, they're paying historically high rates. However, the workhorse of the banking industry is the checking account, the place where we keep the money we need to cover everyday expenses.

If you've ever wondered just how much money you leave in your checking account -- and how much you should move to one of the high-interest accounts -- you're in the right place. Here, we're going to help you zero in on the sweet spot.

The rule of thumb

It may not be exact, but the old rule of thumb is that we should aim to keep between one and two months' worth of living expenses in our checking accounts at all times. Some experts even recommend padding this amount with an extra 30% to cover unexpected expenses.

Let's say you track your spending and learn that you spend an average of $3,000 monthly on housing, transportation, groceries, clothing, and other necessary expenses. According to this rule, you should keep between $3,000 and $6,000 in checking. And if you agree with the experts who call for a little padding in the account, you'll add an extra $900 ($3,000 x 0.30 = $900).

The reasoning

If the idea of leaving so much money in a non-interest bank account when it could be earning interest in another account baffles you, you're not alone. Here are a few reasons why keeping one to two months' worth of expenses makes sense.

You can avoid overdrafts

In January 2024, the Biden administration proposed slashing the cost of overdrafts and other junk fees. While it may not sound like earth-shattering legislation, the act addresses a real problem. According to Reuters, U.S. banks earned a whopping $12.6 billion in such fees in 2019 alone. Keeping more than enough in your account to pay expenses is the easiest way to avoid overdrafts.

It's impossible to know what's around the corner

While we can budget until the cows come home, it's difficult to anticipate everything that could happen. For example, would there be enough in your checking account to cover all your expenses if you're hospitalized for a month and unable to pay your bills?

You can account for seasonal and occasional spending

As easy as it is to come up with how much you spend "on average," no two months are exactly the same. Most people have spikes in spending from time to time. Even if you don't take the advice to pad your account with an additional 30%, keeping enough to pay one to two months' worth of expenses ensures that spikes in spending are covered.

Your debit card may be subject to pre-authorization holds

It's not unusual for a gas station, hotel, or car rental agency to place a pre-authorization hold on a debit card purchase. While the money may not be withdrawn from your account until the transaction is complete, pre-authorizations reduce your available checking account balance. A well-funded checking account makes it less likely that such a hold will lead to overdrafts.

Of course, your sweet spot may vary, depending on how closely you watch your account and whether you have someone else to tend the account and pay bills in your absence. Still, if you're looking for a rough average, it pays to aim for enough to cover at least one month's worth of bills. From there, you can determine whether you need more or it's time to move funds to a high-yield savings account or other interest-bearing deposit account.

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