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How much should you keep in checking and how much in savings?

Optimizing your accounts

People ask, “What should my checking account balance be?” or “What should the average balance in a savings account be?” The better question is, “What’s the right amount for me?”

The answer changes from person to person because it depends on how much you make, how much you spend, and more.

So let’s figure that out. We’ll start with a little refresher about checking and savings accounts.

What is a checking account and what is a savings account?

A checking account is designed to allow you to move your money. Whether that means putting money in your account (making a deposit), paying bills, withdrawing cash, or transferring money to a friend.

These accounts make it easy by allowing direct deposits of your paycheck, giving you a debit card to use at stores or to withdraw cash at an ATM, offering online bill pay, offering ways to pay a friend, and giving you a mobile app to track and manage it all. Oh, and you can still get a checkbook for those times you need to write a check.

You can find a free checking account with no minimum daily balance requirement. Or you can find one that pays interest that you can get for free if you direct deposit your paycheck.

A savings account is designed for exactly what you’d think. Saving. You can transfer money from your checking account or deposit a check or cash into the account. These accounts can pay interest, so the money that you are saving can actually grow. But there is a tradeoff for that interest. You can only make a limited number of withdrawals each month (these are limits that the federal government puts on withdrawals from savings accounts).

Some savings accounts reward you with higher interest if you open both a checking a savings account. Check out your options.

How much to keep in checking

You need the money in your checking to pay your monthly bills. That includes your recurring bills like your mortgage or rent payment, utility bills, auto loan, groceries, and more. Plus, there needs to be money in there you can access to pay for the other expenses that can come up – whether that’s getting the oil changed in your car or heading out to happy hour with your friends.

You want to keep enough money in your account (your checking account balance) to cover these expenses. A good rule of thumb is to keep the total of one or two months worth of average monthly spending in your account. Plus, it’s good to add another 20 - 30% (this helps reduce the chance of you overdrafting your account).

So which is it? One or two months? Well, it depends on you. Some like to have the extra cushion in their checking. Others find that if they have more than one month’s worth of expenses in there, they are tempted to spend it.

To find how much a month’s worth of expenses is, look back over your spending (6 months to a year). For example, if you’re looking at your expenses over a year, add it all up and divide it by 12 months. That will give you your average monthly expenses.

How much to have in savings

For starters, you need to get $1,000 in speedbump emergency money in your savings. This is money that helps you handle those unexpected expenses that pop up. Like a car breaking down or the air conditioner going on the fritz. This money helps you pay for those speedbumps in life without resorting to high-interest credit cards or payday loans.

After that $1,000, you need to put away 3 to 6 months of living expenses in what we’ll call life’s detours money. This is money to help you weather a job loss or an extended illness that keeps you out of work. This is the money that can keep you from going deep into debt or even keep you out of bankruptcy.

In addition to your speedbump and detour savings, you may want to put away money for another goal. Like a downpayment on a house, a wedding, and more. Decide how much you’ll need and divide it by how many months you have and you’ll land on how much you need to put in your savings account each month.

Some savings goals may be further off. Like saving for retirement or a child’s education. For these, it may be smarter to utilize other savings tools – like an IRA for retirement or a 529 plan for college savings. These special accounts can help you save and could give you a tax benefit..

If you have savings goals that are years away (other than retirement or college), you may want to move your money into a savings tool that could pay a little more – like a CD.

A smart move is to talk with someone who can help you work through all the details. A knowledgeable banker can look at your needs and goals with you and help you set up the right checking and savings accounts (with the right amounts) to fit your situation.

If you’d like to know more, contact a First Federal banker to start a conversation.

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