Sometimes I’m fascinated by the simplest personal finance concepts—like the difference between keeping money in your checking account versus a savings account.
How much should you keep in your checking account?
The way I see it, there are a few different models for how much money to have in your checking account:
- Most of your liquid cash, so you always have access to it
- Only the money you’ll spend for a month, plus a cushion of several hundred dollars or so
- As little money as possible, with the rest into the savings
How much money do I have in my account?
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.
Benefits of balancing between checking and savings
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.
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.