Splitting Your Cash Between Your Checking and Savings Account

April 16, 2021

Splitting Your Cash Between Your Checking and Savings Account

Your checking account and your savings account might be with the same financial institution. However, these accounts are used for different purposes. Where you decide to deposit your money will depend on your long-term and short-term financial goals.

Checking Versus Savings

Your checking account is where you put the cash you need to make everyday purchases. You can withdraw and deposit cash quickly.

Your savings account should offer a higher interest rate and should be a place where you can store your money. Your savings account is where your money grows over months and years.

Your checking account should have enough money to cover foreseeable expenses. Your savings account should have between three and six months of reserve money. This is money that you will fall back on if you lose your job, get injured, or cannot work.

How Much of Your Paycheck Should Go Into Your Checking Account?

Your checking account is your operating fund. This is the money that you use to pay bills. It should have enough money to cover between one and two months of expenses.

Your checking account gives you quick access to cash for a small fee. You might avoid some fees by enrolling with direct deposit or using paperless statements. You should put all your money into your checking account until you have enough available to pay one or two months of expenses.

If you get paid every two weeks, you may choose to pay your bills twice a month. Your checking account should reflect what you will need to cover half of the bills for the month as well as money budgeted for discretionary spending.

Some people decide on a dollar amount they want to keep in their checking account. This dollar amount could be unrelated to your expenses. You may pick an arbitrary number like $3,000.

If you choose to limit the amount in your checking account to your monthly expenses, make sure you have a cushion of between 25 and 30%. This will prevent you from getting overdraft fees.

How Much of Your Paycheck Should Go into Your Savings Account?

Once you set aside money to cover two months of your expenses in your checking account, you’ll need to build up between two to four months of reserves in your savings account. It is recommended that you get a high-yield savings account.

High-yield savings accounts offer greater interest than typical savings accounts. Use this to build your emergency fund and create a safety net for short-term savings.

You might base how much you keep in your savings account on the goals you have. For example, if you have decided to set aside twenty thousand dollars to remodel your kitchen, you will want to allocate funds to your savings account so that you can reach that goal. This would be additional money besides your emergency fund.

The Bottom Line

If you manage your savings and checking accounts in a wise way, you will keep control of your money and avoid needless fees. Everyone’s target balance for their savings and checking accounts varies. Pick a number that you are comfortable with, and make a habit of keeping your numbers there.

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