Real talk: How much money do you keep in your checking account? Too much and you’re losing out on potential investment gains. Too little and you risk overdraft fees and a cash-flow emergency. So how much is enough?
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The typical answer to the question: How much should I keep in my checking account? is one month’s expenses. Why? It’s enough to let you cover a month’s worth of bills without worrying that, say, your management company could cash your rent check before your paycheck comes through, leaving you overdrawn.
Of course, the above approach assumes that your monthly bills are predictable month to month, and that one month’s pay will always be enough to cover them. Oh, if only. Take the electricity bill. It’s safe to assume that it will be higher during the hot summer months when many of us resort to air conditioning at least some of the time. So, to account for fluctuations in your monthly expenses, try saving one month worth of take-home pay, rather than trying to save only as much as you spent the month before. If a month of take-home pay isn’t always enough to cover a month of expenses, you’ll need to a) see about cutting down on your expenses and b) keep more of a cushion in your checking account.
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What about out-of-pocket health care costs?
Great question. Health care costs are the wild card in the how much to keep in the checking account debate. More and more Americans are in high-deductible health care plans, where maximum yearly out-of-pocket costs can reach $7,000 or more. If this is you, you’ll need to make sure that you have some liquid or semi-liquid funds ready to help you pay for medical bills that might arise suddenly. Some employers offer Health Spending Accounts (HSAs) or Flexible Spending Accounts (FSAs) to help you save for medical expenses.
If you don’t have access to one of these options, stash some savings for out-of-pocket medical costs, either as part of your dedicated emergency fund (you have one of these, right?) or in a separate account. But that money you’ve earmarked in case you have to hit your deductible or your yearly out-of-pocket maximum shouldn’t all languish in a checking account losing value to inflation.
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Instead, keep a cushion in your checking account that’s at least big enough to cover, say, a co-pay for one in-network doctor’s visit for each member of your family. If you get any larger bills (and we hope you don’t!) you’ll have a little time to negotiate their cost and move savings out of a money market account, no-penalty CD or wherever you keep your savings.
One caveat: Your doctor’s office may be part of the growing movement to make patients pay all out-of-pocket costs before leaving the reception area, rather than waiting to mail you a bill. In that case, you’ll need to keep more cash on hand.
The more variable your monthly expenses and the higher your chances of getting slammed with a big bill, the more cushion you should have in your checking account.
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