How Much Is Too Much in Your Checking Account? 🏦
A Practical Guide to Managing Excess Cash
In my years as a financial planner, I've encountered a surprising number of clients with significant amounts of money sitting in their checking accounts—sometimes more than $100,000. While this might sound like a nice problem to have, it’s actually an indication of a larger issue: uncertainty about what to do next with those dollars. Whether you're working toward financial independence, supporting social justice causes, or donating to mutual aid, it’s essential to manage your money effectively, ensuring every dollar is working for you.
Even if you don’t have six figures in your checking account, I think you'll still find the insights in this post valuable. It's for anyone who feels stuck or unsure about their next financial move. I’ll cover three key points:
How much money is appropriate to keep in your checking account at any given time.
What to do if you find yourself with more than you need in your checking account.
Why people often accumulate so much in their checking accounts, even when they know it's not financially optimal.
How Much Money Should You Have in Your Checking Account?
As of September 2024, high-yield savings accounts are offering around 4% interest on your money. While the Federal Reserve has recently announced a rate cut, these accounts still offer a significant return, with no risk of loss on your principal. This means that holding more money in your checking account than necessary is literally costing you money.
How much should you have in your checking account? In my view, keeping a balance equal to between one and two months’ living expenses makes good sense. This ensures you have enough liquidity to cover immediate costs without missing out on the interest you could earn by keeping excess funds elsewhere.
By "living expenses," I mean your monthly necessities: rent or mortgage payments, utilities, groceries, entertainment, childcare, and other regular bills. It also includes predictable expenses that might not occur monthly but are part of your annual budget, like vacations or gifts. A good approach is to divide these annual costs by 12 and save a portion each month into a separate account, creating a cushion for these predictable, yet irregular, expenses.
One thing I don’t include in this calculation of living expenses is any payroll deductions, like health insurance premiums, dental insurance, or taxes, that are taken out before your paycheck hits your account. If you’re unsure how much is being withheld or what your living expenses truly are, I’m happy to help you figure that out in a one-on-one session.
What to Do If You Have Too Much in Your Checking Account
If you find yourself with more than two months’ worth of living expenses in your checking account and aren’t sure what to do, consider transferring the excess to a high-yield savings account. Many online banks offer around 4% interest and are FDIC-insured, meaning your money is protected up to $250,000 per individual account, or $500,000 for joint accounts. This is a great way to earn some interest while you figure out your next move, and you can still access the money when needed without penalties.
After moving any excess to a high-yield account, the next step is to evaluate your emergency fund. It’s generally wise to have about six months’ worth of living expenses set aside for emergencies. This money can also go into a high-yield account, as its primary purpose is to be available if needed—earning a little interest along the way is just a bonus.
If, after setting aside two months’ expenses in your checking account and six months’ worth in your emergency fund, you still have additional funds to allocate, the next step is to think about longer-term financial goals.
Paying Off Debt and Preparing for Irregular Expenses
If you have high-interest debt, like credit card balances you’ve been carrying month-to-month, it’s worth considering using some of your excess cash to pay that down. Reducing debt frees up future cash flow and strengthens your financial foundation.
Another great use for extra cash is to fund those predictable but irregular expenses we talked about earlier. For example, if you know you’ll spend $5,000 annually on vacations but don’t have that money set aside yet, you could allocate some of your extra funds to a dedicated vacation account. Doing this helps you stay on track with your budget and reduces the likelihood of surprises.
Investing for Long-Term Goals
Once you’ve taken care of immediate and near-term needs, you may want to explore investing as a way to grow your money for the future. This is where things get a bit more complex, and having a financial planner on your side can help you navigate decisions like how much to invest, where to invest, and what type of accounts to use. For example, you might be balancing goals like early retirement, funding your kids’ education, or buying a home. Each of these goals requires a different approach, and understanding the trade-offs is key.
Why Do People Accumulate So Much in Their Checking Accounts?
In my experience, there are a few reasons people end up with large sums in their checking accounts. First, inertia. People often earn more than they need to cover their basic expenses, and without a clear plan, that extra money just accumulates. A bonus or stock distribution can also lead to a sudden increase in your balance, and if you’re unsure about your next financial move, it’s easy to leave it there.
Second, there’s a lot of noise online about what you should do with your money. From buying real estate to starting a business, the advice can be overwhelming, leading to analysis paralysis. People worry about making the “wrong” move with their money, so they do nothing. But doing nothing, especially when it comes to your finances, is often worse than taking an imperfect step toward your goals.
Finally, some people come into money through an inheritance, which can bring its own set of challenges. In addition to the emotional weight of inheriting money, there’s often a fear of disappointing the person who left it to them. This can make it harder to make decisions, especially if you’re unsure what the deceased would have wanted you to do with the money.
Moving Forward with Confidence
We’ve all been paralyzed by inertia or indecision at some point, and it’s perfectly normal. The challenge is to break through that paralysis by getting clear on your goals and what you want your money to accomplish for you. Keep in mind that there are always options, including high-yield accounts and CDs that provide a secure place for your cash, allowing it to earn interest while you plan your next move.
If you think you have more in your checking account than you need, here’s what I recommend:
Get a clear sense of your living expenses.
Keep no more than one to two months’ worth of expenses in your checking account.
Transfer the rest to a high-yield savings account while you figure out your next steps.
From there, consider using extra funds to pay down debt, seed funds for predictable expenses, or start investing for your future. If you're unsure about any of this, it’s worth bringing in a financial planner to help you clarify your goals and create a plan that aligns with your values and priorities. Financial advice isn’t just about numbers; it’s about understanding what matters most to you and making sure your money is working toward those goals.
I’d love to help you navigate these decisions. If you're ready to take the next step, visit this page to explore working together.
