If you’re like most consumers, your checking account serves as your central banking hub. Your paychecks go into that account, through direct deposit if possible, and all your monthly expenses are paid out, so you’ll need to keep enough in there to cover any debit that might come through. Although it can vary based on your own personal preferences, it’s usually best to keep at least one month of living expenses in your checking account, but two to three can give you even more peace of mind.
What Is a Checking Account?
When you first open an account with a bank, you’ll usually be first directed toward a checking account. A checking account is how you’ll fund your everyday expenses, so these accounts are set up to be “liquid,” which means that you can remove and deposit funds as often as you want throughout the month without penalty.
At one time, checking accounts relied heavily on paper checks, which were issued in booklets. But even though you may have checks today, most of your spending activity will likely be handled by a debit card that your bank issues you. These cards are accepted at any merchant that takes credit cards and can be used online or in person. In most cases, your debit card will also allow you to take cash out at ATMs.
Read More: What Is a Checking Account?
Typical Checking Account Balances
How much money should you have in your checking account? If you go by the average, according to a poll conducted by NerdWallet and The Harris Poll, you’ll have about $2,900 in your checking. The median checking account balance is $1,250.
You’ll need enough in your account at all times to cover any bill that comes through. If your mortgage payment is $1,500, a $1,250 balance will be a problem, so you’ll have to make sure there’s enough in your account to cover it on the day the debit comes through. Some people choose to eliminate the stress by keeping enough of a “buffer” in checking to cover two months or more of living expenses.
Other Types of Bank Accounts
When you set up your bank account, the bank representative will likely offer you at least one other option. This is typically a savings account, but it can also operate as a money market, depending on your minimum opening balance. Here’s a breakdown of the various bank account types to help define the differences.
- Savings account – In addition to a checking account, you’ll probably want a place to park money that you don’t need to access right away. A savings account will help you earn a little interest on your money, usually in exchange for leaving a minimum amount in the account. At one time, you were limited to six monthly withdrawals or transfers per month on a savings account, but that restriction was recently lifted.
- Money market – A money market account gives you the interest-earning features of a savings account with the convenience of a checking account. You’ll sometimes get a debit card to go with your money market account. The biggest benefit of a money market account over savings, though, is that sometimes it comes with a higher interest rate.
- Certificates of Deposit – CDs were traditionally popular because of their higher interest rates, but many lenders now offer savings and money market options with interest rates that are higher than their CDs. The big drawback to CDs is that, in most cases, you’ll have to agree to leave your money untouched for at least six months, depending on the term you choose.
- Retirement accounts – Once you have a good cushion in your checking account and some money set aside in savings, you may want to look into putting money into an account for retirement. If your employer offers a 401(k) or pension, you’ll definitely want to look into contributing there, especially if your employer contributes some money to the account. You should also consider an individual retirement account, which will offer you a chance to make some money on your retirement savings.
Checking Versus Savings Balances
The amount you choose to put into any bank account is up to your personal preferences. But it’s important to strike the balance between having enough in checking to pay the bills and transferring funds to an interest-earning account. Even if you’ve found an interest-bearing checking account, you can usually find a savings avenue that pays a little more.
If you’re starting from zero, once you have enough in checking to pay your bills you should look into setting some money aside for emergencies. Ideally, you’ll have six months’ earnings set aside in a savings account as an emergency fund, but even a few hundred or a thousand dollars can help. Then if you need to pay for car repairs or an unexpected medical situation, you can draw from savings rather than going further into debt using a credit card.
Avoiding Overdraft Fees
The biggest reason to make sure you always have enough in your checking account is that it helps you avoid overdraft fees. Those come when your outstanding bills exceed the money that you have in your account. The transaction can’t be processed, so it’s rejected and a fee is attached.
Many banks now cover the payment for you and charge your account. You’ll have a fixed period of time to make sure there’s enough money in the account to pay those debits, any overdraft fees and additional transactions that come through afterward. The average overdraft fee is $33.36, according to Bankrate, but you can find details about your bank’s overdraft policy in your account agreement.
There are other ways to avoid overdraft fees. Keeping an eye on your account will, of course, be a big help, but you can also see if your lender offers overdraft protection. This type of setup will automatically roll money over from elsewhere, such as your savings account, if the time ever comes that you don’t have enough money in your checking account to cover your debits.
Read More: How to Clear an Overdrawn Checking Account
Debit Versus Credit Card
Your checking account will come with a debit card that you can use for all purchases. But there’s a caveat with these cards. If your card number or the card itself is stolen, the thief could wipe out some or all of the money in your checking account, and you’ll then have to wait while you dispute the charge for the funds to be restored.
This can be an argument against keeping a high balance in your checking account. But even losing $1,000 can become a big problem if bills are coming through. Some consumers choose to use a credit card as their primary payment method, then pay the balance off before interest can accrue. If you have a savings account or more than one checking account, you’ll also have a backup while you wait for your funds to be restored.
High-Yield Bank Accounts
High-yield bank accounts are a great way to maximize your interest. It’s never been easier to shop around for a bank account. You can price online lenders and find those that are offering the most interest on both checking and savings.
Often the higher interest comes with some stipulations. You may be required to maintain a high minimum balance or have your paycheck directly deposited into the account. High-yield checking accounts will often require you to complete a minimum number of a certain type of transaction each month to qualify. This type of account may also be referred to as “rewards checking.”
High-yield savings accounts, on the other hand, are much more common. As you’re comparing rates, look out for accounts that have service fees or minimum balance requirements. You may find one with a higher interest rate than another, but these stipulations put it lower on the list than a savings account without it.
FDIC Insurance and Account Balances
As your earnings increase over the years, you’ll run into another issue when you ask, “How much money should I have in my checking account?” The Federal Deposit Insurance Corporation covers each depositor at each lender for up to $250,000. That means if something devastating happens to America’s financial markets, your money will be safe.
But there are some things to know about FDIC insurance. The insurance covers you for up to $250,000 per FDIC-insured bank, per ownership category. That means if you have money in a checking and savings account at the same bank, those are separate. If you and a spouse have a joint bank account, you’re considered two depositors.
Checking Account Perks
Checking accounts may not have the higher interest you get with some savings accounts, money market accounts and CDs, but there are some perks you can get with them. They include:
- Online banking and mobile apps – Many of today’s checking accounts come with electronic banking. You can set everything up to happen automatically, including paying your bills and depositing payments. Best of all, having an app means you can do almost everything from your mobile device, including transferring money, depositing paper checks and monitoring your balance. It all makes it easier to manage your personal finances.
- Rewards – Checking accounts often offer the same points-earning and cashback programs that you get with a credit card. If you’re looking for a checking account, consider this benefit as you’re weighing what various lenders are offering.
- No fees – The days of monthly maintenance fees are mostly gone. However, you will find some banks charge a fee if you don’t keep a minimum balance or you want to earn interest or extra points. Some lenders even waive fees for third-party ATMs, external account transfers and overdrafts.
- Automatic savings – If you want to build savings with minimal effort, this can be a great way. Some checking accounts deposit small amounts to a savings account, often by rounding up on every purchase you make. Over time, these small deposits add up, helping you put money aside for vacations, emergencies or retirement.
Making a Financial Plan
The best thing you can do to help determine how much to keep in each account is to fully understand your finances. Track your spending for several months and note exactly how much you need in your account to cover all your bills even at peak times. Then set a plan to gradually move money into a savings or investment account so that you can start earning interest on that money.
If you have debt, you may feel tempted to pay that off before building your savings. But having at least several hundred dollars in savings can give you something to pay for those emergencies while you’re working on eliminating your debt. The point is that by fully understanding your finances, you can better find ways to make sure you’re managing them, rather than having them manage you.
As long as you have enough money in your checking account to cover all your bills, the actual balance you keep is up to you. A little extra padding may give you the peace of mind you need. But if you can, move some of your money to an account that earns interest to ensure you’re getting the most from your money.
- Investopedia: What Is a Checking Account?
- NerdWallet: How Much Cash to Keep in Your Checking vs. Savings Account
- DaveRamsey.com: 4 Most Common Types of Bank Accounts
- Bankrate: Federal Reserve Lifts Six-Withdrawal Limit on Savings Accounts
- NerdWallet: What Is a Money Market Account?
- Bankrate: What Is an Overdraft Fee and How Do You Avoid It?
- Investopedia: Best High-Interest Checking Accounts
- FDIC: Deposit Insurance FAQs
- CFPB. "A Closer Look: Overdraft and the Impact of Opting-in." Accessed June 10, 2020.
- HousingWire. "The Average Down Payment Is Much Smaller Than You Think." Accessed June 10, 2020.
- Federal Reserve. "Federal Reserve Bulletin: September 2017." Page 19. Accessed June 10, 2020.
- FDIC. "2017 Household Survey Results." Accessed June 10, 2020.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.