Importance of Checking Account Cushion
It is generally advisable to have at least one month’s worth of expenses in your checking account. Ideally you want two months, especially if you are one of those people whose income or expenses are highly variable.
Nevertheless, this rule may not apply the same way to everyone because there exist other factors surrounding individuals’ situations. For example, self-employed individuals should have a greater buffer in their checking accounts for unforeseen (and hopefully temporary) periods of reduced earnings.
Why You Need a Checking Account Buffer
In addition to unexpected, one-time costs being covered by an adequate buffer, it prevents one from using their savings when there are short run periods out of work and lower monthly revenue.
However most checking accounts bear no interest whatsoever and even the best interest bearing ones can’t replace savings accounts when interest rates rise. Consequently, it does not make sense to hold on to extra cash in your everyday spending account.
Instead put any spare money aside for future use into a savings account or similar type bank accounts where they can be earning some return.
Finding Out What Your Optimal Balance Should Be In Your Checking Account
The exact amount that should be kept inside your checking account depends on various factors such as your income level, expenditure and personal finance habits. Consider these critical factors while deciding on what balance you want to maintain.
Income Vs Monthly Expenditure
You must make certain that your checking account has enough funds available to cover your recurring monthly bills including rent/mortgage payments utility charges and groceries.
If you haven’t already done so, calculate how much you spend each month on these things. Also determine what your monthly income is which is pretty simple unless you have multiple or unpredictable sources of earning money at different times during the month.
While I’m not suggesting doing an elaborate budgeting exercise it’s necessary to have a good grasp of how much cash comes in and goes out every month. To get the most accurate picture, average your expenses and income across the last three months. Personally, I’d recommend averaging over the past six to twelve months.
After this you would know how much money is left over that isn’t needed for immediate use and should be cleaned up. If not, identify areas where you can cut costs unless there are possibilities of adding more income quickly.
If your job is stable and predictable expenses do not suggest any major coming up charges, a checking account with one month’s worth of expenses will be sufficient.
Still if there are uncertainties about future revenues or spending, your balance must be at least two month’s worth of expenses.
Can You Lose Your Cash in a Checking Account?
Yes, as long as your bank is FDIC insured. Verify the presence of the member-FDIC logo on your bank’s website or at their facility or use the FDIC’s bank locator tool if you are uncertain.
You may save as much as $250,000 in insured banks’ accounts per ownership category and per financial institution. Hence, so far it is safe to say that your money will not be lost provided you do not have amounts in excess of $250,000 held in one account only. And if you’re getting close to that amount, I can’t imagine how you’ve kept reading till this point.
Conclusion
It’s important to keep an eye on your checking account balance for better financial stability. To prevent fees and overdrafts, make sure that there are still funds enough for one or two months of expenses at least. Nonetheless, it is more cautious to put any extra cash into a high-yield savings or investment account for long-term wealth building.
However, the correct sum to keep in your checking account depends on your specific economic situation which includes revenue streams, outgoings and spending patterns. So analyze how much money you spend monthly and set up checking balance according to it which will improve your financial stability thereby leading to fulfillment of financial targets.
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