How much money should you keep in your checking account?

It’s a question everybody likely wonders, from the billionaire to the person living paycheck to paycheck: How much money should I keep in my checking account?

Of course, if you’re a billionaire, deciding what to keep in your checking account is more of a “fun” academic exercise. If you’re constantly struggling with cash flow, it’s a far more important and non-frivolous question.

According to the Federal Reserve Board’s 2022 Survey of Consumer Finances (released in October 2023) the median household’s checking account balance was $2,800. That said, there is no hard and fast rule on how much money you should keep in your checking account, and so if you’re trying to decide on a dollar amount, don’t pay attention to what other households are doing. Instead, pay attention to your pile of monthly bills.

How much money should you keep in your checking account, and why?

Most experts suggest keeping one to two months’ worth of expenses in your checking account at all times.

For example, say you have $5,000 in bills every month. That means you’d want to consistently keep $5,000 to $10,000 in your checking account.

Why? It’s a good idea to maintain a buffer of money in your checking account to prevent accidental overdrafts. If you have a lot of bills paid through automatic withdrawal, for instance, you don’t want to wake up one morning and discover your checking account is in the negative, and you now owe a handful of overdraft fees.

At the same time, you may also use your debit card to make purchases at the supermarket, clothing store, movie theater, etc. As long as your checking account has more than enough money in it to cover your monthly expenses, you can pay bills and live your life without worrying about your balance. Of course, that isn’t always possible, but it should be the goal.

While it’s good to maintain a healthy cash buffer, it’s also possible to keep too much money in your checking account. In most cases, checking accounts don’t pay high interest rates. So your extra cash would not only be sitting at the bank without growing — you’d actually be losing money over time due to inflation.

If you’re lucky enough to have more money than you need for your checking account, you’ll want to consider putting extra funds in the following places:

High-yield savings account (HYSA)

If your checking account consistently has enough to pay your bills and your living expenses, that’s fantastic. But would you be in good shape if you suddenly needed new tires? Or a new car? Or if you had to pay to have your daughter’s wisdom teeth removed? What if your pet gets sick? What if you lose your job?

You get the idea. A savings account gives you a place to regularly park extra money for those times when you need it. However, the average savings account interest rate is just 0.45%, according to the Federal Deposit Insurance Corporation (FDIC).

The good news: There are a lot of financial institutions — especially online banks — that provide high-yield savings accounts offering as much as 5% APY and up. These accounts allow you to save for life’s unknowns while earning a generous rate and helping your savings grow.

Certificate of deposit (CD)

In many cases, you can earn just as much interest as a savings account offers (if not more) with a CD. These accounts are particularly useful for saving money for a large upcoming expense, such as a wedding, a once-in-a-lifetime vacation, or a payment towards your kid’s college tuition.

That’s because with CDs, you’re expected to keep your money on deposit for a certain time period in exchange for a higher interest rate. CD terms can range from a few months to several years. Once the CD matures (when the time period ends), you can have your money back, plus the earned interest.

If you need the money before the account matures, you can have it — but you’ll pay an early withdrawal penalty. The exception is if you put your money in a no-penalty CD, which generally have lower interest rates than the best CDs on the market.

Money market account (MMA)

A money market account (not to be confused with a money market fund) is like a hybrid savings account/checking account. That is, you deposit savings into a money market account (like you would for a savings account or CD), but you can also often write checks and pay for items using a debit card like you would with a checking account. The interest rate is often comparable to a high-yield savings account, too.

On the other hand, you may be required to maintain a high minimum balance to earn the highest advertised rate. And there may be limitations on how often you can make withdrawals.

You’re probably a good candidate for a money market account if you plan on maintaining a large balance and want to earn a competitive interest rate, but you also want that flexibility to write a check or pay bills with a debit card if you need to.

Investments

If you’re looking to grow your wealth and save for long-term goals like retirement, you’re probably better off putting extra cash into investments.

For instance, if your checking account and high-yield savings accounts are in good shape, then you really should be diverting any extra money into a tax-advantaged retirement plan such as a 401(k) or IRA. Your future self will thank you.

Another option is to invest through a 529 plan, which is an investment account used to pay for qualifying education expenses. If you have children and you hope they’ll go to college someday, this could be an excellent place to put some extra money.

While the above accounts offer tax benefits, they may limit the types of investments you can choose from and how much you can contribute each year. If you’re interested in investing extra money in stocks, commodities, crypto, real estate, etc., you can do so through a brokerage account.