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The more cash in your checking account, the better, right? Not necessarily.
Money in a checking account is easy to access, and keeping balances above the bare minimum can help you avoid monthly maintenance fees. But having a bloated checking account means you're missing out on higher returns in a savings or retirement account.
The right number for you might be higher or lower. It's all about finding out what works for your budget. Here’s a quick look at how much cash to keep in your checking and savings accounts.
Track your monthly spending
For one month, keep a daily spending log to find out how much money should be in your checking account. Include credit card purchases and payments that are automatically deducted from your checking account, like gym membership fees or loan payments.
How much cash to keep in checking: One to two months’ worth of living expenses, based on the spending log, plus a 30% buffer. Why the buffer? Banks earn billions of dollars from fees charged to customers who overdraw on their account or bounce a check. And running afoul of minimum balance requirements could mean being charged a monthly fee by your bank — so it’s best to have a cushion.
» Want to earn interest on all your cash? Check out the best places to put your money and earn interest
Put additional cash somewhere more profitable
Now that you’ve arrived at how much you’ll keep in your checking account, direct anything extra someplace where it can earn interest. Online-only banks tend to offer the best rates on savings, including annual percentage yields around 2%. That is significantly higher than the national average — which means it'll put more money in your account, no matter how much you contribute. You can read more about some of NerdWallet's favorite high-yield savings accounts here.
How much cash to keep in savings: Experts generally recommended keeping three to six months' worth of living expenses in your emergency savings fund.
Once your savings account holds that amount, consider opening an additional retirement account or increasing your contributions to existing retirement funds. Those include 401(k)s and individual retirement accounts.
Keeping the right amount of cash in your checking and savings accounts ensures that you’re able to cover your daily needs and emergencies, avoid unnecessary bank fees and grow your long-term savings. Again, it's about finding what's right for you, not having the average checking account balance.