How Much Should You Keep in Savings vs Checking?
Many people keep all of their money in a checking account because it’s easy and, if an unexpected expense or emergency comes up, they have immediate access to their funds. The downside to that approach is that checking accounts earn very little interest.
Banking and credit union customers can put their money to work by transferring extra funds to accounts that earn a higher dividend, like savings accounts or share certificates, but there are some tradeoffs.
The Role of Checking vs Savings
Checking and savings accounts are designed for different purposes.
Checking accounts are for everyday use. This is where your paycheck is deposited and where you pay bills, make purchases, and manage regular expenses.
Savings accounts are for money you don’t need right away. This can include emergency funds, savings for the holidays or vacations, or planned expenses like tuition or a vehicle purchase.
The goal is to keep enough in checking to stay on top of your spending while using savings to earn a higher yield on money that isn’t needed immediately.
How Much to Keep in Checking
Most people find it helpful to keep a “working balance” in their checking account. This usually includes:
Your typical monthly expenses
A cushion to handle timing differences between paychecks and bills
Extra room for small, unexpected expenses
The right amount depends on your situation. If you’re paid weekly or biweekly, you may not need as much of a cushion. If your income is less predictable or your bills hit all at once, keeping a little more in checking can prevent overdrafts or missed payments.
How Much to Keep in Savings
Moving money you don’t need right away out of checking and into savings can help it earn more over time while still keeping it accessible.
Leaving extra money in your checking account is convenient, but you may miss out on earnings from higher savings rates.
Even small differences in rates can add up over time, especially if you consistently keep a higher balance than necessary in your checking account.
Why Keeping Too Little in Checking Can Create Problems
On the other hand, keeping your checking balance too low can be risky and make managing your finances more stressful than they need to be. If there isn’t enough to cover your bills and everyday spending, you may run into:
Overdrafts or declined transactions
Missed or delayed payments
The need to frequently move money back and forth
Fees for overdrafts or missed payments or being charged higher interest rates for late payments can be expensive. A small cushion in your checking account can help prevent those issues and make your finances easier to manage.
When to Move Money Between Accounts
Finding the right balance often requires periodic adjustments, especially if your income and expenses change over time. There are two basic ways to manage your balances:
Manually transfer money on a regular basis
Set up automatic transfers
One of the easiest ways to put money aside in a higher-yield savings account is by setting up automatic transfers. For example, if you are paid $4,000 each month and your monthly expenses are $3,000, you could set up an auto transfer for $500 each month.
When you don’t have to remember to transfer some of your income into savings or face that choice each month, there may be less temptation to spend that money.
Alternatively, you can establish your own simple routine, like setting a calendar reminder to transfer extra money to savings once or twice a month.
Using Multiple Accounts for Different Goals
Some people find it helpful to use more than one savings account to stay organized and make progress toward specific goals. For example, you might separate:
Emergency savings
Travel or holiday funds
Planned expenses like home or car repairs
Ouachita Valley FCU also offers specialty savings options, like Christmas Club and Vacation Club accounts, which can help you set money aside for specific goals without mixing it with your everyday spending funds.
When to Consider Options Like CDs
If you have money you won’t need for a longer period of time, you might consider options like CDs or share certificates.
These accounts typically offer higher rates than standard savings accounts, but they require you to leave the money untouched for a set period. Withdrawing early can result in a penalty, so they’re best used for funds you’re confident you won’t need right away.
Finding a Strategy That Works for You
The best approach to savings is one you can manage consistently. Keeping your bills covered and your cash flow predictable should come first. From there, you can decide which method will work best for you.
Whether you prefer a straightforward setup or want to take a more hands-on approach, Ouachita Valley FCU accounts will allow you to tailor a system that keeps your finances stable while helping your savings grow.
