How Much Money Should You Really Keep in a Checking Account?

Find out here how much to keep in your checking account so as to avoid an overdraft on your account while earning the highest interest rate on your balances.Image source: Getty Images.

Having a checking account is a prerequisite for many modern necessities -- utilities, gym memberships, and even other financial accounts like credit cards. But while anyone will tell you that you should have a checking account, there isn't any hard rule for how much you should keep in it.

Below, I'll explain the ins and outs of deciding how much to keep in a checking account without getting too scientific about it.

The right amount of money to keep in a checking account

One helpful rule of thumb is to keep one to two months' worth of spending in your checking account and send the rest to savings accounts or retirement accounts. The rationale for this boils down to four simple and straightforward reasons:

1. You'll largely avoid the risk of an overdraft. Even the wealthiest people can slip up and spend more in a short time period than they have in their checking account. If your account falls below $0, you'll incur overdraft fees that can cost $35 or more for every transaction you make while your balance is below $0. If you pay a bunch of bills, dropping your balance to $10, then go buy gas and groceries, you could incur a $35 overdraft charge on both the gas and the grocery purchase. Some traditional banks can hit you with more than $195 in charges for multiple overdrafts in a single day.
2. Preauthorization holds can hurt. Some merchants are notorious for doing "pre-authorization holds" on debit cards. For example, if you use your debit card to buy gas, the gas station may place a hold on your card for up to $100, reducing your available balance (but not your actual balance) by that amount. When the actual purchase amount clears your account, the gas station will then release the hold. This can tie up your money until the pre-authorization is released. It's an especially big problem if you use a debit card to pay for a hotel or rental car, in which case you'll have a large amount of money tied up for days at a time. (If you frequently stay in hotels or rent cars, you really should have a travel credit card.)
3. You'll need to meet the minimum balance requirement (and then some). Most traditional offline banks require you to maintain a minimum account balance to avoid monthly service charges. These typically range from $100 to $2,500 (though most are much closer to the lower end). If your bank has a particularly high minimum balance requirement, you shouldn't worry about how much to keep in your account; your priority should be to switch to a no-fee, no-minimum online checking account.
4. Liquidity matters. While most vendors take cash, debit, and/or credit cards, a select few are cash-only or cash- and debit-only. Having money in a checking account means you're only an ATM or debit card away from being able to make a purchase from a payment-picky vendor. This is especially important when you keep your savings and checking at different banks, and transfers aren't instantaneous.

Admittedly, one to two months' worth of spending is a somewhat arbitrary amount to keep in a checking account. It's roughly high enough for most people to go a long time without having to move money between accounts and to avoid an overdraft.

If you get paid by direct deposit into a checking account once every two weeks, as many people do, then keeping one month's spending in your checking account will all but guarantee you never overdraft your account while not sacrificing too much interest if you forget to move money into savings.

Why you shouldn't keep all your money in a checking account

In a perfect world, we'd all keep our money in savings accounts and skip the checking account altogether, but because regulations limit savings accounts to six transactions a month, they aren't practical for people who need to pay bills or make purchases with a debit card.

This is exactly why checking accounts exist: They're transactional accounts where you keep money you may need in the near future. But they aren't a good place to store all your cash for two big reasons:

1. Low interest rates. Even the very best checking accounts pay less in interest than online savings accounts or money market accounts. You want to keep most of your cash where it earns the most interest, and a checking account is not that place. As I write this, the best savings account pays nearly twice the rate of the best checking account.
2. Theft risk. Though this is a small risk, the reality is that money you keep in your checking account can be easily accessed via a debit card. If you lose your card, or your card number is stolen, a thief can wipe out your account by making unauthorized purchases or ATM withdrawals. Debit cards have poor consumer protections against fraud. If it takes you too long to realize your account has been compromised, you could be fully responsible for any fraudulent charges. Meanwhile, many credit card issuers offer zero liability for fraudulent transactions, which means you're totally off the hook if a scammer makes purchases in your name. This is why we advise using credit cards or cash. You may see this as paranoid, but you only need to have your debit card number stolen once to realize how troublesome it can be.

Don't take these reasons to the extreme, though. I'm not advising that you keep your checking account balance at the bare minimum; just keep things in perspective. Deciding whether to keep one month's expenses or three month's expenses in a checking account is far from the most important decision in your financial life.