Sometimes I’m fascinated by the simplest personal finance concepts—like the difference between keeping money in your checking account versus a savings account. The way I see it, there are a few different models to divide up your cash between checking and savings. You could keep most of your liquid cash in a checking account to always have access to it, you could keep the money you’ll spend for a month in a checking account plus a cushion of several hundred dollars or so, or you could keep as little money as possible in checking and put the rest into the savings to earn some kind of return on your dough—even though it’s not much these days. Which model do you use?
I fall into the middle category. I try to keep an amount equal to my monthly expenses—plus about a $500 cushion—in checking and put the rest into savings. That way, I don’t have to be worried about overdrawing my checking account, but I’m also not stressed that I have too much money in checking that could be earning interest. I think, however, there are some other benefits to this strategy, too:
For one, transferring extra money into savings as quickly as possible can make you forget you have it. That way, when you evaluate whether or not to buy something, you may only look at your checking account balance and not consider what’s in your savings (the way it should be). Chances are, the less money you have available in checking, the less likely you will be to spend it.
The Danger of Debit Cards
Finally, it’s important to remember that the now ubiquitous debit card puts your checking account at risk. In the event your debit card is stolen and somebody makes fraudulent purchases with your card, those transactions can drain your checking account. Although most debit card fraud victims get their money back when the fraud is reported on time, it can take days, even weeks for the funds to be returned to your checking. So ask yourself: Could you stomach losing all the money in your checking account for a week? Two weeks?
Transfer funds to a savings account, however, and they will be safe from debit card fraud, with one exception. Some banks let you set up an overdraft feature that will tap your savings account in the event you overdraw your checking account. In that case, they charge you a small fee (maybe $5) rather than the $30 most banks charge for a regular overdraft. Most banks, however, put a cap on the amount they’ll transfer from savings to cover these overdrafts. Mine’s set at $500. If there’s no limit, a debit card thief could really clean you out. It’s another reason to consider keeping savings at a higher-rate and separate online savings account.
How much do you keep in your checking account? Share your strategy. I’d especially be interested to hear if anybody has a reason for keeping a large checking account balance.