Smart finances: How much money should you keep in a checking vs. savings account

When you open a bank account, it's typically a checking account that provides direct access to your money when you need it. Keeping all your money in one account isn't the best way to maximize returns, so opening another account, such as a savings account, makes sense. When you have two accounts open, you may wonder how much money to keep in each. Check out this guide that outlines how much money you should keep in checking vs. savings, as well as other options for storing your money.

Differences between checking vs. savings accounts

Before we dive into how much money to keep in each account, here's some helpful information about how checking and savings accounts differ. The main difference is that a checking account is a transactional bank account, which makes it easy to access that money when you need it. A savings account is less transactional by nature, so it won't come with as many ways to access the money. Banks rarely issue debit cards linked to savings accounts. You also may not be able to link your savings account to Apple Pay or Google Wallet or get paper checks.

The purpose of the account and the access to the funds in it are two of the main differences. Some banks also have age restrictions on checking accounts that don't apply to savings accounts. The accounts will also differ in their interest rates. A checking account generally has a lower interest rate than a savings account. However, you may be able to find some high-interest checking accounts that help you earn on your spending money.

Allocating your money more efficiently

Now that you understand the main differences between checking and savings accounts, you can figure out how much money to keep in each account.

How much money to keep in checking

You need enough money in your checking account to cover your everyday expenses, including:

• Rent or mortgage payment
• Transportation (car payment, public transportation pass, insurance, fuel, etc.)
• Utilities
• Food (groceries and eating out)
• Cell phone bill
• Childcare (if applicable)
• Pet food and care (if applicable)
• Personal care

You may also have additional expenses, depending on where you live and your lifestyle choices. It's best to keep enough money in your checking account to cover at least two months of these consistent expenses. You might want to increase that amount if:

• Your income is sporadic
• You're a gig worker or rely on tips
• You don't stay on top of your bank account balance regularly
• Your account charges overdraft fees

An overdraft fee is a fixed amount you have to pay if your bank account level dips below the minimum amount. Some checking accounts have a zero minimum, so you'd pay an overdraft fee if you paid for something that dropped the account below a zero dollar balance.

How much to keep in savings

Keeping more than the cost of a few months' worth of everyday expenses in your checking account can cause you to miss out on more money. Since savings accounts typically have higher interest rates than checking accounts, keeping more of your hard-earned cash in a savings account can yield more money that goes back into your pocket every month. Ideally, it would help if you kept at least three to six months' worth of expenses in your savings account. If you lost your job unexpectedly, you'd be covered for at least a few months while you search for a new job.

You might also use your savings account to save for larger purchases, such as a vacation, car, or a down payment on a house. Some people have separate accounts for different expenses and financial goals, while others keep their extra income in their savings account. How you allocate your money depends on your personal preferences and financial habits. If it's tough for you to save money, keeping any extra in a savings account might make it easier to avoid spending. Like they say, "Out of sight, out of mind."

A savings account may have a higher minimum required balance than a checking account, so it's important to avoid dipping below that amount. Keep an eye on your accounts to make sure you have enough in both checking and savings to cover expenses and maintain at least the minimum balance in each.

Tracking monthly spending

Figuring out two to three months' worth of expenses often requires tracking. If you're not sure how much you're spending each month, take a few months to track all your expenses and figure out where your money goes. Tracking your expenses can also help you think before you spend, potentially spot fraudulent activity, and reach your financial goals. It's also a useful tool to figure out how much to keep in your checking account.

Apps and online tools make it easy to track your expenses, and some of these digital options can link directly to your bank accounts and credit cards to pull expenses and categorize them instantly. By tracking over a few months, you can see what expenses occur every month and compare those to one-off or unexpected expenses.

The latter category can also help you plan for your emergency fund. If you have health problems, allotting a little extra each month to a health care account can help you feel more prepared for extra bills for medical treatments and doctor visits. If your car breaks down, you might consider saving money for repairs or a down payment on a different vehicle.

Other options for storing your money

Checking and savings accounts are some of the most popular methods for storing money, but they're not the only options available to you. Although savings accounts generally yield higher interest rates than checking accounts, those rates are often lower than other types of accounts that offer even less access to funds. Additional options include:

• Retirement account: A retirement account allows workers to set aside money to use when they retire from the workforce. The funds in a retirement account are only accessible when you retire, so it's important to put money in this account that you don't need for everyday expenses. Taking money out of your retirement account before retirement often comes with stiff penalties, fees, and interest.
• Education account: An education account allows a parent or guardian to set aside money for a child's education. The funds must be used for qualified education expenses to avoid penalties and fees.
• Money market or certificate account: Money market or certificate accounts are similar to high-yield savings accounts, generally offering higher interest rates than other accounts. The funds in these accounts have to stay in them for the designated period of time to avoid fees and penalties.
• Investment account: An investment account allows you to invest in stocks, mutual funds, and bonds. This type of investing comes with more risk than keeping your money in a more stable place, but it can also yield higher returns. If you have plenty of money in your checking, savings, and retirement accounts, you may consider opening an investment account and trading with app-based investing options.
• FSA (Flexible Spending Account) – A flexible Spending Account is a special account you put money into that you can use to pay for certain out-of-pocket health care costs. You don’t pay taxes on this money, which means you’ll save an amount equal to the taxes you would have paid on the money you set aside.

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Want to learn more about financial planning and saving tips? Check out these other articles:

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• How to start saving money from scratch: A beginner's guide