Most people who have money in a bank have at least a portion of their money in a checking account. However, how much money you should keep in your checking account can be a difficult question and depends on several factors.
Checking accounts allow for easy access to your finances, but if you keep too much of your money in this location, you could be missing out on significant financial gains from sources like investments.
We want to help you understand the pros and cons of keeping your money in a checking account. Below, we’ve laid out some advice about alternatives and how to decide how much you should keep in your checking account.
Why You Need A Checking Account
A checking account is an excellent place to keep money for quick access. For example, with just your routing number and account number, you can pay bills, pay rent, or cover other expenses and even configure these to automatically withdraw.
In addition, most banks and credit unions provide debit cards, allowing you to withdraw funds from an ATM, or directly make purchases out of your checking account. This enables a better tracking and budgeting system, as opposed to paying with cash, which is harder and more tedious to monitor.
Finally, when your money is in a checking account and your financial institution is FDIC insured, your money is safe and sound. FDIC insurance keeps funds up to $250,000 per account insured in case something happens.
Alternatives To Checking Accounts
If your money isn’t in a checking account and isn’t cash, it has to be somewhere! Many people will keep their money in one of a few alternatives.
Here are some of the most common:
High-Yield Savings Accounts
Many savings accounts offer high-interest rates and can help you earn money while you save. These are a good alternative if you’re establishing an emergency fund and want to keep your savings safe and secure with no risk.
Stocks are another great way to potentially reap some financial gains. Depending on where you invest, they can be low-risk. Many companies are stable and well-established, and you can get consistently high returns with little worry. Keep in mind though that the stock market will always be riskier than some of these alternatives.
Other places to invest in include real estate, mutual funds, and bonds.
Peer-to-peer lending is a particular type of investment where you invest some of your money in a personal loan that is given to an individual. Usually, you do not invest large amounts of money in one loan, but rather, your money is split across several loans, decreasing your exposure.
Whether you want to keep the majority of your money in a safe place or go a more risky, high-return pathway is highly dependent on your financial situation. However, when your money is locked away in investments, you cannot easily access it to cover your daily and recurring expenses. Thus, you’ll likely still want to maintain some cash on hand — or, as we advise, money in a checking account.
Other Factors To Consider
Depending on your financial institution, there may be monetary constraints on your checking account balance. For example, you may be required to maintain a particular balance or face a penalty from the bank or credit union. Sometimes, individuals who do not keep above a certain balance are charged fees to maintain the account.
In other cases, you may inadvertently incur overdraft fees if you don’t keep enough money in your bank account. For example, if you have automatic bill pay and your balance is too low, the bill may push you into the negative, causing the bank or credit union to charge you an overdraft fee.
How Much, On Average, People Keep In Their Checking Account
According to the Federal Reserve, as of 2019, the median amount of money that consumers have in a checking account is $5,300. This account is variable over the years, dropping steeply during the 2008 financial crisis and rebounding between 2008 and 2019.
How much money you keep in your checking account, however, is greatly dependent on your income and your expenses. It’s a good idea to have easy access to cover 1–2 months of expenses, and this amount seems to be reflected in the U.S. data.
Protecting The Money In Your Checking Account
Checking accounts offer you excellent benefits. However, to protect the money in your checking account, you want to be mindful of your financial habits and take care of how you manage your money. Click below to learn more about what you can do to keep the money in your checking account safe.