How Much Cash Is Best Kept in Bank Accounts?
While it is important to have a little cash in your bank account, it is also possible to keep too much cash on hand when you don’t really need it. In the end, some of this money could be invested elsewhere, where interest rates are much more profitable. But how much money should you have, and how much is too much or too little? This is what financial advisors usually recommend.
How much cash should you keep in your checking accounts
A checking account is your primary bank account for daily expenses, for paying for your daily expenses and recurring bills, including those charged to your credit card. Experts often recommend having enough money in your checking account to cover at least one month of expenses, plus overdraft fees (if you have one).
If you are not sure what this amount might be, you need to create a budget that will take into account your income and expenses. (Read more about creating a budget in this Lifehacker post .)
How much money should you keep in a savings account
You will also want to set aside some cash for an emergency, ideally in a savings account. Most financial advisors offer to postpone the reserve fund in the amount of from three to six months of your expenses (it varies depending on who you ask). Of course, your account shouldn’t be limited to your emergency fund. You can also include in this account any other relatively short-term savings, such as a down payment on a house or money you set aside for travel.
Unlike a checking account, which usually offers less than 0.3% annual interest rate , high yield savings accounts offer 0.6% – not very good , but still the best place to store. (The only catch with savings accounts is that you’re usually limited to six withdrawals per month.)
There are other alternatives , such as money market accounts or certificates of deposit, but they offer similar interest rates and have limits on how soon you can withdraw the amount.
Consider investing extra cash
Once you have accumulated sufficient financial cushion to cover your daily expenses and emergencies, consider investing any extra cash. Investing differs from saving money in that you are trying to grow your money by buying things like property or stocks that increase in value over time.
Unlike saving, investing comes with a certain amount of risk to your money, but the returns can be much higher. Adjusted for inflation, S&P 500 index stocks average about 7% per year , while real estate can return about 8.6-10% per year – much more than you would get with a 0.6% savings account. … To learn more about investing, read this post on Lifehacker .