Here’s how much money you should keep in a checking account

You most likely have a checking account, but do you know how much to keep in it? There are downsides to keeping either too little or too much money in checking, experts say.

While keeping too little cash in a checking account and getting dinged with overdraft fees is undesirable, Americans with too much money in such a low-yield repository could be leaving valuable interest on the table.

One of the upsides of the Federal Reserve’s raising interest rates to their highest levels since 2008 is that individuals are seeing greater gains on money they save — that is, if they store those dollars in the right place. 

Here is what you need to know about splitting funds between your checking and savings accounts.

Build in a buffer to avoid overdrafts

Checking accounts are best used as a place to store funds for everyday purchases and money that goes toward paying monthly bills. It’s easy to make deposits and withdraw cash from these kinds of accounts using an ATM machine.

“Use this account for day-to-day transactions and keep enough in the account to avoid fees,” Bankrate.com senior industry analyst Ted Rossman told CBS MoneyWatch. 

Experts recommend storing enough cash to cover roughly two months worth of expenses plus a 30% buffer in a checking account.

“Checking accounts are typically just used as operational accounts. Money is constantly being deposited and withdrawn so you don’t want to run too thin, but you also don’t want to make the mistake of leaving too much money in there,” said Shon Anderson, a wealth strategist and president of Anderson Financial Strategies. 

Owners of accounts that are too lean run the risk of overdrawing and getting dinged with hefty fees.

In 2021, the average fee for overdrawing an account was a record $33.58, a 22-cent increase over the past two years, according to a Bankrate survey. These fees have generated hefty profits for big banks, to the tune of $9 billion annually in overdraft, ATM and other fees according to the Center for Responsible Lending.

“Things like that can really start a snowball effect to a bad financial position,” Anderson said. 

“Dead money”

Don’t let your checking account become too bloated, either, given that this type of account doesn’t typically reward cardholders with any interest.  

“You don’t want to make the mistake of leaving too much money in there, because it’s essentially dead money,” Anderson said. “It’s very rare to earn interest on a checking account.”

If you have excess money after calculating two months’ worth of expenses plus a buffer, the next step is to pour two-to-four months worth of expenses into a high-interest savings account. 

How much interest do savings accounts pay?

Smaller online institutions are currently advertising interest rates as high as 3.91%, compared to the roughly 0.1% bigger banks tend to offer. 

At that rate, with $10,000 in a savings account, you would earn an additional $390 a year, risk-free.

“Deposit rates are the most attractive we’ve seen in years — that is the silver lining of interest rate hikes,” Rossman said. “Smaller institutions compete on rates and consumers who shop around can definitely be rewarded.”

Because bigger banks’ deposits ballooned while people hunkered down and saved money during the pandemic, they’re not incentivized to advertise attractive savings rates to consumers. 

Even if you already have a savings account, look up its annual percentage yield and compare it to other banks’ offers, given that they can vary widely. 

“Some banks can give ridiculous menial amounts just to say they pay interest. Big banks are notorious for that,” said Dallas-based certified financial planner Katie Brewer. “The good news about high interest rates is it shouldn’t be hard to get some decent interest on cash that’s sitting around.”

Losing out on interest

Not everyone’s aware how instrumental savings accounts can be in growing one’s own wealth.

Savers could have earned $42 billion more in interest in the third quarter of this year if they had kept the funds in high-yield savings accounts versus in accounts at big banks, according to a Wall Street Journal analysis of S&P Global Market Intelligence data.

“Some of it is a knowledge gap, and some people don’t have the money to save,” said Courtney Richardson, an investment adviser and founder of The Ivy Investor, an investment resource geared toward women. 

“Give yourself a cushion and put the rest of the money in a place where you’re going to get your most bang for your buck,” Richardson advised. 

To be sure, more than half of Americans earning between $100,000 and $150,000 live paycheck to paycheck, according to LendingClub, and don’t have excess reserves to invest.  

Rossman, of Bankrate, urges them not to be discouraged. 

“While we recommend six months’ worth of expenses saved up, only 1 in 4 people have that,” he said. “But savings is a journey, not just a destination, and it’s the habit of saving that is important.”