For many people—most people, honestly—saving money and putting personal finance tips into practice is challenging. Tucking away money for an emergency fund, much less a down payment on a house, retirement, or a child’s college tuition, can take years and a huge amount of discipline. Of course, barring catastrophe, once you establish those emergency savings and develop positive spending and saving habits, staying on top of your finances gets a whole lot easier.
Once you’re no longer living paycheck to paycheck and have money tucked away to cover a medical emergency, a job loss, or a vacation, you’ve reached financial independence—but that doesn’t mean you can just stop thinking about where your money is going. Turns out, it is possible to keep too much money in the bank, and tucking all your saved money there can actually hurt your long-term financial goals.
That’s not to say you shouldn’t keep any money in the bank. Liquid savings—money that is easily accessible without incurring a fee, should the need arise—is necessary for well-balanced financial health.
For most people, those savings take the form of an emergency fund. “When thinking about your overall savings, one should consider an emergency fund as a part of the mix,” says Shirley Yang, vice president of Marcus by Goldman Sachs.
Yang says most financial experts agree that your emergency savings should include six months’ worth of living expenses, but the actual number depends on your financial stability. Lauren Anastasio, certified financial planner at SoFi, says three to six months’ worth of expenses is a good rule of thumb. If you work in a stable industry, are in good health, and live in an area with a low cost of living, you may be able to get away with putting less money—only three months of expenses—in your emergency fund; if there’s a chance large expenses may pop up in your future, more money may be smarter.
“This money should be kept separate from your regular checking account to avoid accidental spending or the temptation to use funds for anything other than an emergency,” Anastasio says.
Keeping those savings in a bank account (instead of an investment account) means you can access them when you need to, but it also means you have a lot of money sitting in one place, depreciating with interest. To keep the value of your emergency fund high, keep it in a high-yield savings account; Marcus and SoFi both offer accounts with at least 2 percent APY, so your emergency fund will continue to grow. (Most online banks offer higher interest rates than their brick-and-mortar peers.)
With all that money tucked away in your savings account, what do you do with your checking account? This is probably the account you deposit paychecks into, pay bills from, and use to cover day-to-day expenses, so you definitely want some money there, but checking accounts are also notorious for having low interest rates, so the money you keep there isn’t doing any work for you.
There’s no one-size-fits-all answer to how much you should keep in your checking account, unfortunately, because everyone’s monthly expenses are different. There are a few ways to determine how much to keep in the account, though.
If you like set numbers, Stash Wealth recommends a $2,000 to $3,000 cushion at most to account for the ebbs and flows of your money; that may be a little high for some people, especially if their expenses are on the low side.
Yang suggests calculating the best number for you based on your needs. “Consumers should determine their estimated monthly expenses and keep enough in their checking account to cover those expenses,” Yang says. “Any additional funds left over, they should consider transferring to something that gets a higher-yield.”
Anastasio says it depends on how much you’re comfortable having in reserve. In general, though, “a guideline that makes sense for your checking account is to keep the equivalent of one net paycheck,” she says. “This ensures the amount is right for everyone regardless of income level.”
At the end of the day, you need to determine how much of a cushion you need in your checking account to feel confident that you can cover all your expenses (and maybe even a few splurges). One of these guidelines might help you figure out what that number is; once you’ve done that, you can rest assured that you’re not keeping too much in the bank.
Keep in mind that some financial institutions charge penalties or fees if your checking account balance falls below a certain threshold. Find out what the rules for your account are and be sure to fulfill the requirements to avoid paying a fee. And the reverse is true, too: If your balance is too high—$250,000 high—it won’t be covered by the FDIC; if you are keeping that much money in banks, spread it across accounts or institutions to make sure it’s all insured.
All your other money—because you’re continuing to save, right?—should go into investments, where it can be put to better use through investing, actually earning money. (Letting your money earn money for you both helps your savings grow and takes some of the pressure off you.)
Those can be CDs, bonds, stocks, mutual funds, or another of the many investing options out there, but you want your money to do a little work for you. If it’s invested, it’s hopefully growing, moving you a little closer to your financial goals.