How much should be in your savings versus checking account?

October 04, 2022

By Lois Sullivan

How much should be in your savings versus checking account?

Young woman reviews her checking account and savings account on her smartphone.

Like most people, you have a checking account and a savings account with a financial institution. Each account serves different purposes, but you may wonder how to split your money between the two. Some people believe that keeping more money in a checking account is beneficial, while others prefer to put as much money as possible in a savings account. No matter which end of the spectrum you're on, it's helpful to consider how much should be in a savings account versus checking account.

What is a checking account?

A checking account is a deposit account with a financial institution that provides easy access to the account funds. Checking accounts are also referred to as demand or transactional accounts. When you have a checking account, you can use a debit card or checkbook to issue payments using your funds. You can also set up direct deposits into the account. Banks and credit unions rarely impose withdrawal limits or minimum balance requirements on checking accounts, making them more liquid than other types of accounts.

Many people use their checking accounts to store funds they plan to spend on their monthly expenses, such as housing, utilities, food, fuel and entertainment. You might have automatic payments set up for recurring bills, or you may use a debit card to make payments. Having a checking account makes it easier and safer to spend your hard-earned cash. The liquidity of this account type results in a lower interest rate, so the funds in a checking account don't earn as much interest as those stored in other account types. 

What is a savings account?

A savings account is a deposit account with a financial institution that permits individuals to store funds rather than provide access to the money for spending. You can still typically take cash out of a savings account, but you may face limits on the number of withdrawals you can make in a month or a minimum required balance. Having a savings account gives you a place to keep the money you don't need to spend on everyday expenses, allowing you to plan and prepare for the future.

One of the advantages of keeping funds in a savings account is earning more interest. Savings accounts are interest-bearing, and some financial institutions offer high-return savings accounts with higher interest percentages for qualified clients. The federal government also backs the money stored in savings accounts with secured financial institutions up to $250,000, so you can feel confident that your money is protected.

You might use a savings account as a short-term savings vessel as you work toward having enough money to buy a new car or make another large purchase. Your savings account may also serve as your long-term storage solution, where you keep the money you're saving for future education costs or other expenses.  

How much should be in a savings versus checking account?

With a clear understanding of the purpose of each account type, you may wonder how much money should be in a savings versus checking account. Of course, you want to keep enough cash in each account to avoid overdraft or other maintenance fees. But having an inflated checking account doesn't serve you or help you reach your financial goals. A checking account can't compete with a savings account regarding interest rates, so keeping your excess funds in a savings account is a much better decision.

Keep enough money in your checking account to cover at least one month of living expenses plus 30%. You can figure out this number by tracking every expenditure you make from your checking account and on your credit card (if applicable) for about a month or two. Use this tracking system to determine how much you spend each month, multiply it by 0.30, and add this number to your monthly estimate. Keeping that amount in your checking account can protect you from overdrawing. 

A savings account can be a storage option for any extra money you earn that you don't have to spend on monthly expenses. Work toward keeping enough money in your savings account to cover three to six months of living expenses as an emergency fund. You might also set aside money in a savings account to make a big purchase in the future, such as a down payment on a house. If you own a business or are self-employed, you may want to aspire to build your savings account even more to create a more substantial safety net.

While these ideas can provide some guidelines, only you can determine how much money should be in a savings versus checking account in light of your financial situation.

Choosing a financial institution

Keeping enough money in your checking account to cover your monthly expenses can protect you from overdrawing as you pay bills. But if you don't have a financial institution, use these tips to choose the right one for your needs.

Look at interest rates

The interest rate offered on a savings account should be a significant factor in your decision. When you put money away in this type of account, it can accrue interest on an annual basis. A higher rate earns you more free money when you keep your funds in the account.

Assess the account requirements

Something else to consider before you open new accounts is whether any requirements or limits apply. Some banks offer high-yield accounts, but the higher interest rate only applies to a specific dollar amount. Any funds beyond that amount would be subject to a lower interest rate. You might also want to consider whether minimum account balances apply and how many withdrawals you can make from the account without being subject to a penalty. 

Use one financial institution

If you plan to transfer money from checking into savings, it's often easier to do so when both accounts are with the same bank or credit union. Many financial institutions offer online transfer options, so you can quickly move money from one account to another without going into a branch. If you're working toward building up your savings account, setting up an automatic transfer can help you achieve your goals without being tempted to spend the money before you transfer it into savings.

Read customer reviews

The service you get from your financial institution plays a significant role in your overall experience. It's essential to ensure your bank or credit union puts your needs first and provides a high level of service, particularly if an issue arises and you need help immediately. Make sure to read online reviews to get a sense of the level of service provided by the financial institutions you're considering for your checking and savings accounts. 

Determining the amount in your savings versus checking account can help you manage how to pay your bills while avoiding unnecessary fees and planning for your financial future. Alliant offers high-yield savings and checking accounts, plus resources to help you become more financially savvy. Contact us to learn more or start the process of opening an account.

Additional reading on saving and spending:

Use your "bonus" paycheck to reach your financial goals faster

Comparing savings accounts: What's the difference?

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