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While it’s essential to maintain some cash in your bank account, keeping too much cash on hand can be unnecessary. Instead, that extra money could be put to work in other investments that offer higher interest rates. So, what’s the right amount to keep, and when does it become too much or too little? Let’s explore what financial advisors usually recommend.
What’s the Ideal Amount of Cash for Your Checking Account?
A checking account is your main account for daily transactions, used for managing regular expenses and recurring bills, including those tied to your credit card. Experts generally suggest having enough cash to cover at least one month's worth of expenses, plus any overdraft fees (if applicable).
If you're unsure of what your total should be, it’s necessary to create a budget that reflects your income and expenses. (For further details on how to create a budget, check out this Mytour post.)
What’s the Ideal Cash Balance for Your Savings Account?
You’ll also want to reserve some funds for emergencies, ideally within a savings account. Most financial experts recommend putting aside an emergency fund of three to six months of your expenses (though this can vary based on who you ask). Your savings account doesn’t have to be just for emergencies—it can also be used for short-term goals, such as a down payment on a home or travel expenses.
Unlike checking accounts, which generally offer less than 0.3% annual percentage yield, high-yield savings accounts typically offer around 0.6%. While not a high return, it's a better option for storing your money. (One limitation with savings accounts is that you’re usually allowed only six withdrawals per month.)
There are other options, such as money market accounts or certificates of deposit, but they provide similar interest rates and often have restrictions on how quickly you can access your funds.
Think about putting any surplus funds into investments
Once you have enough savings to manage daily expenses and handle emergencies, it’s time to think about investing any leftover cash. Unlike saving, investing focuses on increasing your wealth through assets like real estate or stocks that appreciate over time.
Investing carries more risk compared to saving, but it can yield much higher returns. For instance, the S&P 500 index has delivered an average annual return of around 7% after adjusting for inflation, while real estate investments can provide returns between 8.6% and 10% annually—significantly higher than the 0.6% return you’d get from a typical savings account. For further insights on investing, visit this Mytour post.
