How Much Money To Carry in Checking vs. Savings

Written by Credit Union of Texas
Published February 12, 2019
how to determine how much money to carry in your checking vs savings how to determine how much money to carry in your checking vs savings

This is a common question people ask when they are just starting out. We can help you answer this question, and we’ll get you off on the right foot with money management habits that will serve you well in the future. Your checking and savings accounts are a combination of tools for everyday money management and short-term savings. So, let’s explore various strategies for managing your money between checking and savings accounts.

Keep enough in your checking account to cover daily and monthly expenses

To understand how much money you need to keep in your checking account each month, you must have a good handle on your monthly expenses. You will use this account to pay bills, cover expenses, and to access cash. It’s important to know how much money you spend each month. One way to do this is to keep a daily spending log for three months. Track the checks, debit card payments and other payments you make.

Your checking account might see significant traffic during the course of a month. It’s a good idea when you’re budgeting to sort all of your expenses into categories such as utilities, food, automobile expenses, rent or mortgage, and so on. These categories will give you an idea as to where your money is going each month, and it will help you plan for how much you need to keep in your checking account. It will also help you realize what areas of spending you can cut back on if you are finding that you have little money left over at the end of the month.

There are three general expense categories:

  • Fixed expenses: These are monthly expenses that remain fairly constant month-to-month, such as a cell phone bill, groceries or a car payment.
  • Discretionary expenses: This is money you spend on things you want versus the things you need, like going to the movies or eating out at a restaurant.
  • Financial goals: This is money you put away for future goals like college tuition for a family member, or retirement.

You will want to balance your checking account regularly to ensure that you have funds available for upcoming bills or if you plan to use the debit card associated with the account to make a purchase.

Some people use the online bill payment associated with their checking account to schedule recurring or one-time payments. This feature allows you to plan for expenses and ensure that bills are paid on time. If you use this feature, make sure you have enough money in your account to cover these payments.

You may choose to set up recurring electronic bill payments to be made from your checking account. These payments are made through an Automated Clearing House (ACH) network that transfers funds from one bank account to another. Make sure you have enough money in your account to pay for these regularly scheduled withdrawals. Employers who offer direct deposit of wages also use the ACH system to deposit your wages into your account. Many people prefer direct deposit because the funds are available immediately.

Have a solid overdraft protection plan that works for you

Overdrafting your account happens when transactions hit your account when there are insufficient funds to cover the amount. An overdraft can occur when automatic payments withdraw, when too many debit card transactions occur, or if checks clear from your account without the funds to cover it. These fees can add up quickly and can be difficult to recover from if they happen in rapid succession. Make sure that you have a plan in place for these scenarios.

While some people simply keep a buffer in their checking account, others use a personal line of credit to cover expenses that overdraft their checking account. A personal line of credit charges interest, so pay it off quickly to save on interest charges. You may also be able to set up overdraft protection from your savings account. There is usually a small fee for these types of transfers, but it’s much less expensive than the full overdraft fee.

Consider the interest you could earn

Checking accounts are used to pay for day-to-day expenses, and they typically do not offer interest rates unless you’re able to carry a large minimum account balance.

Should you have any money remaining after your monthly expenses, it should be kept in an interest-bearing savings account. You should be prepared to transfer money as needed to your checking account. Your savings account should be used for either expected expenses that arise, such as gifts during the holidays; or unexpected expenditures, such as medical bills, an auto repair or the need for a new appliance. On the other hand, if you have more than six months of expenses sitting in your savings account, you should consider other higher interest savings products, such as a certificate of deposit (CD).

There are standard savings accounts that feature low- or no-minimum-balance requirements, and there are high-yield savings accounts that offer higher interest rates. However, you may need to make an initial deposit and maintain a specific balance in a high-yield savings account to qualify for the increased rate.

Earn more interest with a CD for your long-term savings

CDs are a way of setting aside a portion of your savings for a pre-determined period of time that could range from a month to 5 years and earn a fixed interest rate. The interest rate depends on the term of the CD and the amount you initially deposit. Your credit union will offer a lower interest rate for a shorter-term CD and a higher interest rate for a longer-term CD. When you acquire a CD, you are loaning money to a borrower (in this case, your bank or credit union) for a specific amount of time. On the maturity date, the borrower promises to pay you the principal and the interest. CDs feature the highest interest rate savings product offered by your financial institution.

It can be tricky to know exactly how much money you should keep in your checking account or knowing when you have enough money in your savings that you should explore additional options to earn more interest. It’s good to grow your money with interest-bearing accounts, but not at the expense of having insufficient funds in your checking to cover life’s expenses. Once you spend time tracking your expenditures, you’ll get an understanding of how much money you will need to keep in each of your accounts.