Your checking account is important for managing day-to-day finances, but that doesn’t mean you should keep all of your cash there. Keeping too little could lead to overdrafting or missing payments. But keeping too much could mean missing out on interest you could earn elsewhere.

So, how much money should you keep in your checking account? The right amount depends on your monthly expenses, income, and financial habits. Here are a few simple guidelines can help you find your ideal balance.

How much money should you keep in your checking account, and why?

Most experts suggest keeping one to two months’ worth of expenses in your checking account, plus a buffer of at least 10%.

For example, say you have $5,000 in bills every month. That means you’d want to consistently keep at least $5,500 (one months’ worth of bills, plus an extra 10%) in your checking account at all times. However, if you want to be on the safe side, you could bump that up to $11,000.

Maintaining a buffer of money in your checking account prevents accidental overdrafts. If you have a lot of bills paid through automatic withdrawal, for instance, you don’t want to wake up one morning and discover your checking account is in the negative, and you now owe a handful of overdraft fees.

At the same time, you may also use your debit card to make purchases at the supermarket, clothing store, movie theater, etc. As long as your checking account has more than enough money in it to cover your monthly expenses, you can pay bills and live your life without worrying about your balance. Of course, that isn’t always possible, but it should be the goal.

To track your inflows and outflows and keep tabs on how much buffer you have, a money management tool like Quicken’s Simplifi app can automate that task.

Where’s the best place to keep your extra cash?

While it’s good to maintain a healthy cash buffer, it’s also possible to keep too much money in your checking account. Most checking accounts pay little, if any, interest on your balance. So your extra cash would sit at the bank without growing, and even losing value over time due to inflation.

If you’re lucky enough to have more money than you need for your checking account, you’ll want to consider putting extra funds in the following places:

High-yield savings account (HYSA)

A savings account gives you a place to park extra money for those times when you need it. However, the average savings account interest rate is just 0.37%, according to the FDIC.

The good news: There are several financial institutions — especially online banks — that provide high-yield savings accounts (HYSAs) with rates as much as 10 times the national average. In fact, some of the best HYSAs earn over 4% APY right now. These accounts allow you to save for life’s unknowns while earning a generous rate and helping your savings grow.

Certificate of deposit (CD)

In many cases, you can earn just as much interest as a savings account offers (if not more) with a CD. These accounts are particularly useful when saving money for a large upcoming expense, such as a wedding, a once-in-a-lifetime vacation, or a down payment on a home.

CDs allow you to lock in a guaranteed interest rate for the entire term. CD terms can range from a few months to several years. Once the CD matures, you can have your money back, plus the earned interest.

If you need the money before the account matures, you can have it, but you’ll pay an early withdrawal penalty. The exception is no-penalty CDs, which generally have lower interest rates than the best CDs on the market.

Money market account (MMA)

A money market account (not to be confused with a money market fund) is like a hybrid savings account/checking account. That is, you deposit savings into a money market account (like you would for a savings account or CD), but you can also often write checks and pay for items using a debit card like you would with a checking account. The interest rate is often comparable to a high-yield savings account, too.

However, you may be required to maintain a high minimum balance to earn the highest advertised rate. And there may be limitations on how often you can make withdrawals.

You’re probably a good candidate for a money market account if you plan on maintaining a large balance and want to earn a competitive interest rate, but you also want that flexibility to write a check or pay bills with a debit card if you need to.

Investments

If you’re looking to grow your wealth and save for long-term goals like retirement, you’re probably better off putting extra cash into investments.

For instance, if your checking account and high-yield savings accounts are in good shape, then you really should be diverting any extra money into a tax-advantaged retirement plan such as a 401(k) or IRA. Your future self will thank you.

Another option is to invest through a 529 plan, which is an investment account used to pay for qualifying education expenses. If you have children and you hope they’ll go to college someday, this could be an excellent place to put some extra money.

While the above accounts offer tax benefits, they may limit the types of investments you can choose from and how much you can contribute each year. If you’re interested in investing extra money in stocks, commodities, crypto, real estate, etc., you can do so through a brokerage account.

Frequently Asked Questions (FAQs)

Manoj Sharma

Manoj Sharma is a Senior Writer on the banking team at Tax Assistant. He provides information on budgeting, bank accounts, the banking industry, and other related topics. Using original data and methodologies, he helps you identify the best financial institutions, accounts, and products tailored to your needs. Manoj holds a degree in Journalism and Political Science from Syracuse University. All articles are strictly reviewed and fact-checked by our panel of expert Chartered Accountants, including CA Devendra Saini, CA Nikhil Khunteta, and CA Ankit Goyal