You may have heard the expression “save for a rainy day,” and you certainly should. But how much should you be saving, and how much of that money should you be keeping in your checking account?
Generally speaking, it’s a good idea to keep your savings and your checking separate. After all, you don’t want to be tempted to spend the money that you’ve worked so hard saving on a frivolous impulse buy. But at the same time, you should keep a little extra on hand in your checking account. This will help you avoid overdraft fees, for instance, if you make a mistake and draw too much from your account.
So what’s the right amount? Well, that depends on a few things. Here are our five tips for knowing how much money you should keep in your checking account.
1. Maintain the Required Minimum Balance
Some checking accounts have minimum balance requirements. Before signing up for an account, check with your financial advisor to see what, if any, requirements are associated with the account. The minimum amount required often varies based on the financial institution and the particular type of account you have.
For instance, Rivermark Community Credit Union offers a Free Checking Plus account with a minimum opening balance of $25. Once your account is funded with the opening deposit, however, there are no further minimum balance requirements. If you do have a checking account with a minimum balance requirement, you should make sure you always have at least that amount in your checking account to avoid any penalties or fees.
2. Calculate Your Monthly Bills
Once you’ve made sure that you have enough money to cover any minimum balance requirements, make sure you have enough in your account to cover your monthly bill payments. Many people use the auto-deduct option for payments such as rent, utilities, and debt obligations, such as credit cards or student loans. Using auto deduct not only ensures your bills get paid on time, but you may also get an interest rate deduction by using this option.
This can save you quite a bit of money over time. But only if you have enough money in your account to cover these bills. If you forget you’re signed up for auto deduct and you don’t have enough money in your account to cover the payments, then you’ll likely incur late or overdraft fees. That’s why you should add up your monthly bills and always keep enough money in your checking account to cover the total.
3. Account for Monthly Expenses
Once you know how much you’re spending on your monthly bills, you’ll also want to add up how much money you need for other monthly expenses. For instance, you probably use your checking account to pay for things like gas, groceries, and other basic living expenses.
If you have a monthly budget, great. You can use that to know how much you spend in an average month. If you don’t have a monthly budget, now is a good time to sit down and create one. This free budget worksheet from Consumer.gov is a good place to start.
You can look at your checking account for the past few months and total up how much you’re spending on food, gas, entertainment, and any other regular expenses. Then create a budget with categories for these things, as well as for your monthly bills. Assign a maximum spending amount for each category in your budget and then add up all these amounts. This is how much money you’ll need each month to cover all your expenses.
If you see that you’re spending more than you’re making, you may need to cut back in certain areas. Your financial advisor can help you do that. Once you know how much money you need to cover all your average monthly expenses, you should aim to keep that total amount in your checking account.
4. Add a Little Extra
Remember that your budget is based on an average month. There will always be some months when you spend a little extra. You could have a water leak, for instance, that may cause your water bill to be higher one month. Or you may have certain expenses that only come around once or twice a year, like property taxes or membership fees. You’ll want to account for these extra expenses as well and add them to your overall monthly budget amount. If you have an annual expense, divide that amount by 12 and add that amount into your monthly budget.
Once you have a new monthly budget that accounts for all your annual expenses, add at least 10% to the total monthly budget amount so that you can cover unexpected expenses without having to dip into your savings.
5. Put Your Savings Elsewhere
In general, you should plan to keep a full month’s worth of expenses plus 10% extra in your checking account at all times. It may be tempting to keep more money in your checking account. However, you should set any extra aside in a separate savings account. As we mentioned before, this will help you avoid the temptation to spend the extra cash and will help you save for bigger-budget items, such as a vacation, car, or new home.
Most Americans live paycheck to paycheck. Wouldn’t it be nice to instead have enough cash in your checking account to use the money from this month’s paychecks for next month’s expenses? Doing that will keep you one step ahead of the game. It may take some time and work to get to that place, but we can help. Our financial advisors can come up with a plan to help you find extra savings, cut back on your spending, and plan for the future. So give us a call and we can put you on the path toward future financial success right now.