Having enough money in your bank account is important for financial security and peace of mind. The amount you should keep in your account depends on your personal financial situation and goals. Here are some guidelines for determining how much is right for you.
Emergency Fund
Experts recommend having 3-6 months of living expenses set aside in an emergency fund. This money should be kept in a savings account and not invested, so it’s readily accessible if you lose your job, have unexpected medical expenses, or face other financial emergencies. Generally, aim to save enough to cover at least 3 months of your fixed expenses like rent/mortgage, food, transportation, and utilities.
How much do you need for a 3-6 month emergency fund?
To determine the target amount for your emergency savings fund:
- Calculate your fixed monthly expenses (rent/mortgage, food, transportation, utilities, etc.)
- Multiply that number by 3-6 months depending on what makes you comfortable
For example, if your monthly expenses are $2,000, you would want $6,000-$12,000 saved in your emergency fund account.
Tips for building your emergency fund
- Automate deposits into your emergency savings account each month
- Aim to set aside at least 10-15% of your take home pay
- Make lifestyle adjustments to save more money
- Use windfalls like tax refunds to grow your emergency fund
Day-to-Day Spending Money
In addition to your emergency fund, it’s wise to keep extra money in your checking account for daily spending needs. The amount will vary based on your lifestyle and spending habits.
Tips for determining your target daily account balance:
- Review 3-6 months of bank statements to understand your spending patterns
- Take your average monthly expenditures and divide by 2
- That’s a reasonable amount to try keeping in your checking account as a buffer
For example, if you spend around $2,000 per month according to your bank statements, aim to keep $1,000 in your checking account for day-to-day expenses.
Savings Goals
Beyond emergency and daily spending funds, you may be saving money for other goals like:
- Down payment on a house
- New vehicle purchase
- Retirement
- Education expenses
- Vacations
- Big ticket purchases (appliances, furniture, etc.)
Determine how much you need to save each month to reach your savings goals and keep that money in your account until it’s time to make the purchase or investment.
Tips for hitting your savings targets:
- Set up automatic transfers from checking to savings accounts
- whenever possible, send windfalls like bonuses and tax refunds straight to savings
- Cut discretionary spending to free up more money for goals
- Take advantage of workplace retirement plans like 401ks
- Use investment accounts for long-term goals like retirement
How Much is Too Much?
On the flip side, you don’t want to keep too much money in low interest checking and savings accounts. The FDIC only insures up to $250,000 per depositor, per insured bank.
Additionally, money kept in savings earns minimal interest – generally less than 1% APY. You miss out on growth potential from investing.
As a general rule, don’t keep more than 3-6 months living expenses in checking/savings. Invest amounts beyond that threshold.
Signs You Have Too Much Money in Your Accounts
- You have more than 6 months expenses saved in bank accounts
- Your balances are consistently well above what you need for day-to-day spending
- You haven’t touched the money in years
- Your money is only earning 0.5% APY or less
What to do if you have excess funds:
- Evaluate your savings goals – increase targets if needed
- Pay down high interest debt like credit cards
- Invest the excess money in retirement and long-term investment accounts
Minimum Account Balances
Banks and credit unions often have minimum balance requirements to avoid monthly maintenance fees on checking and savings accounts. Make sure you know your account minimums and keep sufficient funds to avoid fees.
For example, your bank may charge a $10 monthly fee unless you keep at least $1,500 in your checking account. Review your account agreements to understand the balance requirements.
Strategies to avoid minimum balance fees:
- Shop around for free checking/savings accounts
- Negotiate with your bank to remove minimums
- Maintain the minimum balances
- Link accounts to waive fees
The 50/30/20 Budget Rule
A popular budgeting guideline is the 50/30/20 rule. This states you should spend:
- 50% of after-tax income on needs like housing, utilities, food, transportation.
- 30% on wants like hobbies, travel, dining out.
- 20% toward financial goals like debt payments, emergency savings contributions, retirement funds.
This balanced approach helps you build savings while still having money left over for fun. The exact percentages can vary based on your circumstances.
Factors That Impact Account Balances
Your ideal account balances fluctuate over time based on where you are in life. As your financial situation changes, re-evaluate how much you should have readily available.
Common life events that influence account balances:
- Marriage – Combine finances and save for joint goals
- Having children – Higher expenses but access to tax advantages
- Home ownership – Build emergency savings, pay down mortgage
- Career changes – Income fluctuations change savings ability
- Paying for college – Less discretionary income during education years
- Retirement – Draw down investment accounts over time
Reevaluate your target checking and savings balances during major life changes.
Conclusion
Here are some final tips for how much to keep in your bank accounts:
- Have 3-6 months living expenses in your emergency fund
- Maintain a buffer for daily spending needs in checking
- Save for short and long-term financial goals
- Invest extra money beyond your emergency reserves
- Keep enough to avoid account maintenance fees
- Use a balanced budget approach like the 50/30/20 rule
- Adjust balances as your financial situation evolves
Determine the right checking and savings account balances for your lifestyle. Having sufficient funds to cover expenses and achieve financial goals will provide peace of mind.