Are Americans Keeping Too Little Cash in Their Checking and Savings Accounts?

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Choosing the right bank account is an important decision, as it can impact how easily you’re able to manage your daily finances. But you’ll also have to decide how much to keep in each account. Let’s explore your banking options to make sure you’re doing it correctly.

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Which Bank Account, and for What?

Derek Ripp, a CFP and partner at Austin Wealth Management, suggests structuring your cash into three groups:

1. Routine, Recurring Expenses

These are the predictable bills that come in every month. Since you’ll need to access this money often, it’s a good idea to keep it in a checking account. A new GOBankingRates survey found that 90% of Americans have a checking account that they currently use. This type of account allows an unlimited number of withdrawals. Some offer higher interest rates, though you won’t (and shouldn’t) keep enough money on deposit to earn any significant returns.

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Start by figuring out the lowest amount of money you need to cover your monthly expenses, then make sure you maintain at least that balance in your checking account at the start of each month. “The amount you hold here is up to you,” Ripp said. “Some people keep the bare minimum and others prefer more of a cushion.”

In the GOBankingRates survey, researchers discovered 37% of Americans have $100 or less in their checking account and 19% have $100 to $500 in their account to cover expenses. It’s likely many people spend more than $500 a month, so they should really be trying to up that account a little in order to always be able to cover their monthly expenses without needing to rely on a credit card or some other form of payment.

It’s also good to keep in mind that if you don’t keep enough money in your account, you could get hit with overdraft fees, which average a hefty $29.50, according to Statista.

So, be sure to monitor the balance regularly. Fortunately, most banks allow you to set up email and text alerts that notify you when the balance drops below a certain threshold.

2. Larger, Planned Expenses 

Aside from daily spending, you might have plans for larger purchases over the next year or two. For example, you might be saving up for a new car, a major home repair or a big vacation.

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These types of expenses can benefit from a sinking fund. This is a special savings account for irregular expenses that you know are coming and can prepare for. For example, if you’re planning to buy a car in one year, you can divide the cost of the down payment by 12 and set aside that amount in your savings each month. This helps spread the cost of a big-ticket purchase out over time so it’s more manageable.

A regular savings account is a great place to store your sinking fund. However, you can give your savings a boost by choosing a higher-interest account such as a money market deposit account or certificate of deposit (CD). This will help you increase the balance in your savings account. With 32% of Americans from the GBR survey saying they have $100 or less in a savings account, these types of accounts can help maximize savings and help you stay on track. Everyone has short- and long-term financial goals, so they should probably be keeping more in this account in order to hit those goals. Don’t access this cash for fun money; instead, allow it to grow while you keep saving.

You will want to keep in mind that these types of accounts limit the number of withdrawals you can make and may even charge a penalty for withdrawing early, so it’s important to deposit money you know you won’t need for a while. Online banks are also a good option since the low overhead costs often translate to higher rates and lower fees for customers.

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Don’t be tempted to invest this cash, though, since it’s best to not take risks with money you know you’ll need. Ripp said, “The amount of cash you set aside here may vary year to year, but these expenses are as important to consider as your immediate monthly expenses.”

3. Emergency Funds

Finally, it’s important to have money set aside for unplanned expenses, such as a medical emergency or bills that need to be covered if you lose your job. “This is money that is designed not to be spent, except in the event of a true emergency,” Ripp explained. “Having this cash available can save you from financial catastrophe should the worst occur.”

Even though you aren’t supposed to touch this money unless you absolutely have to, it’s important that the funds are readily accessible. That means they should be kept in a regular savings account. While it can be a good idea to choose a high-yield savings account that helps your money grow over time, be wary of online options that may require several days to transfer funds you need immediately.

If you are younger, Ripp said you may aim to set aside three months of savings. However, if you have a family or a lot of expenses, you should have at least six months socked away in an emergency fund. If you’re a business owner, freelancer or someone who has unpredictable income, nine to 12 months is ideal.

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Amen Oyiboke-Osifo contributed to this article.

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About the Author

Casey Bond is seasoned editor and writer who has covered personal finance for more than a decade. Currently, she is a reporter for HuffPost covering money, home and living. Previously, she held editorial management roles at Student Loan Hero and GOBankingRates. Casey’s work has also appeared on Yahoo!, Business Insider, MSN, The Motley Fool, U.S. News & World Report, Forbes, TheStreet and more.
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