Following the stock market and other financial markets over the past year has been a wild ride. For those less inclined to tolerate the ups and downs in their investment portfolios, the modest, yet steady returns of deposit accounts may offer some relief. Some of the best high-yield savings may earn at a rate that can surpass inflation, for example. And while checking accounts typically earn interest at a lower rate, they provide maximum access to your funds.
But how much money should you have in your checking and savings accounts, particularly in comparison to your investments?
While there’s no magic number for either, as everyone’s financial circumstances are unique, we’ll walk you through some simple strategies to help you decide how much to save in these deposit accounts.
How much money should you keep in your checking account?
Checking accounts are designed for frequent use. You might use your checking account to pay for expenses such as rent and mortgage payments, student loans, credit card bills, and more.
Most checking accounts offer easy access to your money, allowing you to spend with a debit card, withdraw cash from an ATM, or send money via automated clearing house (ACH) transfer to other accounts or for direct payment to a vendor.
But with few exceptions, checking accounts are not the best place to store funds long term as they generally offer either no interest or lower yields than other types of deposit vehicles. According to the Federal Deposit Insurance Corp. (FDIC), the national deposit rate on interest-bearing checking accounts is 0.07% APY. By contrast, the average interest rate on a savings account is 0.38% APY and 0.59% APY on a money market account, as of this writing.
“Often, your checking account isn’t going to pay you very much. I’d only keep a little bit of a buffer for your monthly bills,” says Barbara Ginty, a Certified Financial Planner (CFP®) and host of the Future Rich Podcast. “If your monthly bills are $3,000, I’d recommend keeping an extra $1,500 or $2,000.”
In other words, it’s a good idea to have at least one to two months’ worth of expenses in your checking account. If you make a transaction when there isn’t enough money in your account to cover it, you could be charged an overdraft fee. Some financial institutions also have minimum balance requirements—when you drop below a certain threshold, you might incur a monthly maintenance or minimum balance fee.
How much money should you have in a savings account?
It’s generally recommended to have at least three to six months’ worth of living expenses set aside as an emergency fund. After you determine the right amount for your needs, work toward achieving that goal. If you already have the cash, but it’s in your checking account, consider transferring it to a high-yield savings account to make that money work harder for you.
“Your emergency fund is where you should be keeping the bulk of your cash,” says Ginty. “At this point, you’re getting paid real interest on those accounts—somewhere between 4% and 5% on either high-yield savings or money market [accounts].”
You don’t have to have your savings account at the same institution as your checking account. It makes sense to shop around for an account that offers a top yield and suits your needs and preferences. Most of the time you’ll find the highest yields with an online bank as they have lower overhead than brick-and-mortar institutions and can pass those savings on the customers in the form of lower fees and higher interest rates.
How to maximize your savings
If you don’t already have a financial cushion in a savings account, the first step is to start building one. Aim to put aside at least a small amount of money from each paycheck towards a high-yield savings account (HYSA) or money market account (MMA). By putting your savings on auto-pay, the money doesn’t hit your checking account, so you don’t have the opportunity to spend it. You can start small and increase the amount over time.
Choosing the right account is also important to get the most out of your money. An account that earns a high-yield will help your savings grow faster than one with a lower interest rate. Some of the best high-yield savings accounts earn at rates of 4% APY and higher, more than 10 times the national average for a savings account.
Although it’s a smart money move to have or to build towards an emergency fund, you also don’t want to keep all of your money in one. Some banks will limit the number of withdrawals you can make each month, making them an impractical choice for bill-paying. Additionally, savings accounts (and money market and checking accounts) are variable-rate accounts so your APYs will fluctuate over time, often in tandem with changes to the federal funds rate.
If you put too much of your cash into a savings account versus a higher-yielding (and riskier) investment—such as an index fund—you could end up missing out on some substantial stock market gains down the line. It’s worth consulting with a financial advisor to determine the right balance of investments vs. savings for your individual needs.
Make sure your emergency fund is big enough
Generally, experts recommend saving three to six months’ worth of living expenses in an emergency fund. Ginty, however, suggests that people with children or dependents aim to save more than that amount as they’re able.
“If you’re a single parent, I’d recommend at least six months, but somewhere between six and 12 months. But if you’re a single individual and nobody is relying on you, you can probably get away with three months, but it really depends on your dependents,” says Ginty. “If you’re the breadwinner of your family and you have a spouse that’s staying at home, I would err on the side of having 12 months.”
If you can’t save that much right off the bat, saving even a small amount of money can make a big difference in an emergency. Without one, an unexpected big expense or job loss could lead to debt.
The takeaway
A savings account is part of a strong financial foundation and should be part of anyone’s roadmap. The amount you should aim to save will vary based on your living expenses, the number of dependents you have, and risk tolerance. A good goal is to put away at least one to two months’ worth of living expenses in a checking account and an additional two to four months in a savings account.
You don’t have to keep your checking and savings accounts with the same bank, and it can pay to shop around and choose accounts that combine high yields with other factors like low fees and accessibility. It may even be wise to have multiple savings accounts for different goals, as well as a CD or CD ladder for funds you don’t think you’ll need quick access to.