A checking account is a prerequisite for paying for many aspects of modern life -- utilities, gym memberships, and even other financial accounts like credit cards. But while having a checking account is a must, there isn't a hard rule for how much to keep in checking.
Below, we'll explain how much to keep in your checking account.
What's the right amount of money to keep in a checking account?
One helpful rule of thumb is to keep one to two months' worth of spending in your checking account. If you prefer an extra safety net, consider adding 30% to that number as a buffer. So if your monthly expenses total $3,000, you'd want to keep between $3,000 to $7,800 in your checking account.
The rest of your funds should go to savings accounts or retirement and investment accounts.
Why should you keep 1-2 months worth of expenses in a checking account?
The rationale for keeping at least one or two months' worth of expenses in a checking account boils down to four reasons, which we'll discuss in detail below.
1. You'll largely avoid the risk of an overdraft
Even the wealthiest people can slip up and spend more than they have in their checking account. If your checking account balance falls below $0, you'll incur overdraft fees. You could pay $35 or more for every transaction made while your balance is below $0.
Since some traditional banks charge you for up to four to six overdraft fees, you could be hit with up to $210 in charges for multiple overdrafts in a single day. Many banks offer overdraft protection, typically for a fee, to protect you from these extra charges.
2. Pre-authorization holds can hurt
Some merchants are notorious for putting "pre-authorization holds" on debit cards. For example, if you use your debit card to buy gas, the gas station may place a hold on your card for up to $100. This reduces your available balance (but not your actual balance) by that amount. When the actual purchase amount clears your account, the gas station will then release the hold.
Pre-authorizations can tie up your money until they are released. They are commonly used by hotels and rental cars, and can tie up your money for days at a time. Pre-authorizations can hit your checking account balance. A better option? Use a credit card, especially a travel credit card, rather than a debit card for these payments.