Is your checking account overflowing? Here’s what you should do

Almost everyone has a checking account, but the amount of money people keep in their checking accounts varies widely. Checking account balances tend to vary based on income, age and other factors. However, to decide how much money to keep in your personal checking account, you need to look at more than your paycheck and birth certificate. Here’s what you need to know.

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Understanding the role of current accounts

Most people with checking accounts use them regularly for spending, often several times a day. They access the funds in their accounts using debit cards, online transfers, automated teller machines, ATM transactions, cash withdrawals and old-fashioned paper checks.

Checking accounts are tools, not investments, but they are some of the most well-used tools in almost everyone’s financial kit. They enable countless vital financial tasks, from paying the rent and buying groceries to gassing up the car and keeping the power on.

Obviously, you don’t want your checks to bounce because that will cost you overdraft fees. Perhaps less obviously, you don’t want to keep more money in checking than you need. That’s because most checking accounts don’t pay interest on the balance, and interest-bearing accounts generally pay lower rates than other accounts and investments.

With all this in mind, what is the ideal checking account balance? No single answer fits all. Some people need more, some less. But it’s relatively easy to figure out your own ideal checking account balance if you examine the relevant factors.

What is the typical checking account balance?

The average checking account balance is around $9,100, but that might not be the right number for everyone. First, that average is inflated by a relatively small number of people who keep large balances. The median, which is the point where half the people have more and half have less, is about $2,900.

Behind those broad measurements of the entire population of current account holders, you can find variation around specific characteristics of individuals. Not surprisingly, higher earners tend to have higher checking account balances.

Less obviously, perhaps, as people age, checking account balances tend to increase, peaking around ages 65-74. The upshot is that whatever figure you decide is your ideal checking balance, be prepared to revise it as you get older or if you start earning more.

What is the ideal current account balance?

The ideal theoretical amount might appear to be just as much as you’ll need to cover any outgoings until the next time your paycheck, investment dividend distribution, monthly government or pension benefits, or other source of income arrives to shore up your account. This would mean avoiding any overdraft fees and not leaving a penny more than necessary in a no-interest or low-interest deposit account.

The story continues

But there is more to this calculation than that. Also consider:

• Windfalls – If you fail to account for an irregular automatic payment, such as a semi-annual insurance premium, you may be caught out and start paying overdraft fees and bounced checks.

• Pre-Authorization Hold – Some merchants may hold a portion of your funds until a transaction is completed, which may reduce the available funds in your account. A good balance helps ensure this doesn’t lead to an overdraft.

• Account Minimums – Many checking accounts charge monthly maintenance fees if your balance drops below a certain amount. To avoid these fees, it may be worth keeping enough in your account so that you always meet the minimum.

• Emergencies and Special Cases – Certain situations, from obtaining essential supplies following natural disasters to making purchases from a small local merchant at a farmer’s market, often require cash, not credit.

• Lost Earnings – While some checking accounts pay interest on cash balances, most do not and those that pay less than alternative accounts such as high-yield savings accounts, money market accounts or certificates of deposit. Over time, keeping much more than you need in checking can cost you.

To complicate matters, the type of account matters. For example, some checking accounts have no minimums or charge little or no fees. If you ask your bank about basic or student accounts, you may be able to identify some of these and be less concerned about a low balance.

To help you stay on top of your balance and manage it to your best advantage, consider budgeting apps that track your spending. This is mandatory information to determine an optimal current account balance.

If all of this is too complicated, the general recommendation is to keep one to two months’ worth of maintenance expenses in your checking account. Some experts even advise adding an extra 30% as a cushion, although this is just a rule of thumb and may be more than many people need. A financial advisor can help you determine a good emergency fund based on your circumstances.

Conclusion

The ideal checking account balance varies according to individual circumstances and the need to balance competing concerns. At the very least, you want to keep enough in there to avoid bounced checks and overdrafts and their associated fees and other inconveniences. But you don’t want to overdo it by avoiding fees, because then you’d lose money you could be making by putting it in an interest-bearing account or investment.

Financial planning advice

• Review your finances regularly, and if you see something you don’t understand or just aren’t sure what to do, consider consulting a financial advisor. The free SmartAsset tool matches you with up to three verified financial advisors serving your area, and you can have a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help reach your financial goals, get started now.

• Why put your money into anything less than the best? SmartAsset’s regularly updated features list, describe and provide links to the best current accounts on the market.

• Keep an emergency fund handy in case you face unexpected expenses. An emergency fund should be liquid—in an account that isn’t exposed to significant fluctuations, such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with prospects and provides marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

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