What you'll learn:
How Much Cash to Keep in the Bank?
Having bank accounts simplifies bill payments and money management. Plus, a savings account acts as a safety net for unforeseen expenses.
Yet, the big question remains: how much should you stash in your checking and savings accounts?
Can having an excess of cash in the bank be detrimental?
Striking the perfect balance is pivotal when it comes to managing these accounts effectively.
The 50/30/20 Rule
How you structure your budget significantly impacts your bank balance.
The widely embraced 50/30/20 rule, based on allocating percentages, offers a clear budgeting approach:
- 50% for needs: Covering essentials like housing, utilities, and groceries.
- 30% for wants: Non-essential expenses such as dining out or leisure activities.
- 20% for savings and debt repayment: Directed towards savings or paying off debts.
The “needs” category encompasses crucial living expenses, while “wants” cater to discretionary spending. Meanwhile, the 20% allocation to savings or debt repayment offers a crucial avenue for financial growth.
Following the 50/30/20 method, the 20% set aside for savings could flow directly into a bank account. This reserve could be channeled into building an emergency fund in a high-yield savings account or earmarked for short-term financial goals.
How Much Cash Can I Keep in the Bank?
Financial institutions often establish thresholds for maintaining funds across different account types like checking, savings, money market, or CDs. These limitations might apply on a per-account basis or as a collective cap encompassing all your accounts.
For instance, a single deposit account could have a cap of $1 million, while an aggregate limit across all accounts might be set at $3 million.
These limitations can vary among banks; some institutions might have higher or lower thresholds, while others might not impose any restrictions at all.
To ascertain if your bank imposes cash-holding limits, you can refer to their website or the customer agreement. Alternatively, contacting the bank directly to inquire about any such deposit limits can provide clarity.
How Much Cash Should I Keep in the Bank?
Determining the ideal sum to keep in your checking account involves various factors and considerations. Let’s break it down:
Budgeting Approach
Your monthly budgeting method plays a role. If you budget per paycheck and receive biweekly payments, keeping at least half a month’s expenses ensures bill payments until the next payday.
For added security, extending this to a full month’s expenses or even two months can create a more robust safety net.
Earning Interest and Fee Structure
Assess if your checking account accrues interest on balances or if your bank imposes fees. Some institutions charge monthly maintenance fees, which can often be avoided by maintaining a minimum balance in your checking account or across all your linked accounts.
Overdraft Protection
Concerns about overdraft fees can prompt a decision to maintain a buffer in your checking. By retaining an extra amount—say, $500 or $1,000—beyond your usual balance, you create a safeguard against potential overdraft charges caused by a negative balance.
The decision on the optimal amount in your checking account aligns with your financial habits and goals. It’s about finding the balance that covers your expenses, safeguards against fees, and aligns with your comfort level in managing unexpected costs.
How Much Cash Should I Keep in Savings?
The sum you maintain in your savings account hinges on your financial objectives and goals. Here’s a breakdown:
Short and Long-Term Goals
Savings accounts serve as ideal repositories for funds earmarked for short-term aspirations (like a vacation) or more extended financial goals (such as buying a home).
The amount you allocate to these accounts correlates directly with the specific goal. For instance, setting aside $3,000 for a trip, $10,000 for a car, or $20,000 for a wedding provides a clear target.
Budgeting for Goals
Establishing a budget tailored to each savings goal assists in determining the required amount. Whether it’s for a vacation, a significant purchase, or an emergency fund, having a clear budget helps outline the necessary savings amount.
Multiple Accounts or Subaccounts
Consider opening separate savings accounts for individual goals or opt for a bank offering subaccounts within a single savings account.
Subdividing your savings into different categories enables targeted savings for various goals, allowing you to contribute at a pace that suits your financial plan.
By aligning your savings with specific objectives and setting budget-driven targets, you can effectively manage your savings accounts, ensuring you’re steadily progressing toward each goal.
How Much Cash Bank Accounts Have?
Understanding how others manage their bank accounts can offer insights into the broader approach to cash holdings. Here’s an overview:
Account Types
Transaction accounts encompass various financial tools like checking and savings accounts, money market accounts, “call deposit” accounts for investment funds, and prepaid debit cards.
Average Holdings
According to the FDIC’s data from 2019, 98% of American households owned at least one transaction account. The mean value across these accounts was $42,000, while the median, which represents the middle value, stood at $5,300.
Essentially, considering the full spectrum of balances, the average individual holds slightly above $5,000 in such accounts.
Unbanked or Underbanked Populations
It’s important to note that these figures exclude individuals who are unbanked or underbanked.
The Federal Reserve’s 2021 report on U.S. Household Economic Well-Being highlighted that about 18% of American households either don’t utilize bank accounts or rely on alternative financial services.
Observing these averages underscores the diverse approaches people take in managing their accounts and highlights the wide spectrum of financial habits among households.
FDIC and Bank Deposits
The FDIC plays a pivotal role in safeguarding deposits at banks, encompassing both physical and online institutions.
Understanding FDIC insurance coverage helps protect various account types, including checking, savings, money market, prepaid debit cards under specific conditions, and certificate of deposit (CD) accounts.
The standard FDIC insurance amount stands at $250,000 per depositor, per insured bank, for each account ownership category in the case of a bank failure.
For instance, if you have multiple accounts—like checking, savings, and money market—solely under your ownership at a single bank, their combined balances up to $250,000 are insured.
However, in a joint account scenario with a spouse or another individual, the coverage applies separately to your portion of the funds, amounting to another $250,000 coverage limit.
Exceeding this limit poses the risk of potential loss if the bank encounters financial failure. It’s essential to note that such occurrences are rare; in 2020, there were merely four bank failures.
To manage cash within these limits, consider both your bank’s account restrictions and the FDIC insurance boundaries. If your funds exceed $250,000, spreading them across multiple accounts in different banks could mitigate risks.
This strategy aids in adhering to both bank-imposed account limits and FDIC coverage limits, enhancing overall security for your deposited funds.
How Much Cash to Have in My Emergency Fund?
Determining the ideal size of your emergency fund involves assessing your individual circumstances. Traditionally, a rule of thumb advises stashing away three to six months’ worth of expenses.
For instance, if your monthly expenses total $3,000, this guideline suggests an emergency fund of $9,000 to $18,000.
However, personal situations greatly influence this calculation. Here are some factors to consider:
Industry and Job Stability
Industries with high job competition or potential job loss might warrant a larger emergency fund. For instance, in a competitive field where job searches could stretch over several months, having nine to 12 months’ worth of expenses saved could offer a safety net.
Income Streams and Expenses
Diversified income sources or lower expenses might necessitate a smaller emergency fund. Having multiple income streams or minimal expenses can cushion the blow of losing a primary job.
Variable Income or Self-Employment
For those with fluctuating monthly earnings, averaging out expenses can serve as a guideline. The Bureau of Labor Statistics suggests an average American household expense of $5,111 per month in 2020.
Following this, an emergency fund might range from $15,334 to $30,666 for three to six months’ worth of expenses.
Ultimately, your emergency fund size should align with your comfort level, financial stability, and ability to handle unexpected expenses.
Evaluating your unique circumstances allows you to tailor an emergency fund that provides adequate protection against unforeseen financial challenges.
How to Choose a Bank Account?
Choosing the right bank account is crucial, whether you’re dealing with a substantial sum or a modest one. Here are some key considerations for different types of accounts:
Checking Account
Minimum Balance Requirements: Evaluate if the checking account imposes minimum balance requirements and ensure they align with your financial habits.
Monthly Fees: Check for any monthly fees associated with the account and assess if they are reasonable given the features offered.
Interest Earning: Some checking accounts offer interest. Consider this factor, especially as interest rates fluctuate. Be aware of the Annual Percentage Yield (APY).
Savings, Money Market, and CD Accounts
Minimum Balance and Monthly Fees: Similar to checking accounts, scrutinize minimum balance requirements and monthly fees for savings, money market, and CD accounts.
APY: Keep a close eye on the APY, especially in times of interest rate adjustments by institutions like the Federal Reserve.
Comparison between Banks: Compare traditional and online banks. Online banks often provide higher interest rates, lower fees, and reduced minimum deposit requirements. However, weigh this against the convenience of branch access.
General Considerations
Interest Rate Trends: Be aware of the interest rate trends. If rates are rising, it might be beneficial to explore alternatives to your current bank.
Comparison Shopping: Regularly compare offerings from different banks to ensure your money is working optimally. This is particularly true for online banks, known for competitive rates.
Online vs. Brick-and-Mortar: Assess the pros and cons of online versus brick-and-mortar banks. While online banks often offer better rates and lower fees, traditional banks provide branch access for in-person services.
In summary, selecting the right bank account involves a thoughtful analysis of your financial preferences and the features offered by different institutions.
Regularly reassessing your choice ensures that your money is earning the best possible returns and that the account aligns with your evolving financial needs.
FAQ
How much savings is too much?
Stashing excessive funds in savings may forfeit potential higher returns elsewhere. Additionally, be mindful of FDIC limits: amounts beyond $250,000 might lack protection if your bank faces a rare failure.
Is having a substantial sum in a money market account problematic?
Money market accounts offer a blend of flexibility and interest, similar to savings and checking.
Having significant funds in a money market account isn’t concerning if earmarked for future goals like a vehicle or home purchase. Yet, adhere to FDIC limits, just as you would with savings accounts.
Should I consolidate all my money in one bank?
While centralizing funds is convenient, consider optimal rates for savings and minimal fees for checking. Diversifying across different banks may yield better deals.
Spreading funds across multiple banks also ensures compliance with FDIC coverage limits, enhancing financial security.
