How Much Cash Should I Keep in the Bank

Even if it's crucial to have some cash on hand, it's also easy to keep too much on hand when you don't actually need it. After all, there are other places where those funds could be placed with considerably better interest rates. How much cash, though, is ideal, and how much is excessive or insufficient? Here are some suggestions that financial counselors frequently make.

How much cash should you keep in your bank accounts?

Your principal bank account for daily purchases is a checking account, which you should use to pay off regular bills and daily expenses, including those you incur with a credit card. Experts frequently advise keeping at least one month's worth of bills, plus the overdraft fee, in your checking account (if you have one).

You'll need to make a budget that takes into account both your income and expenses if you're unsure of what that amount might be. (Read this Lifehacker article for more information on setting up a budget.)

 

How much money should you keep in a savings account?

Additionally, you should set aside money, preferably in a savings account, for unplanned expenses. Most financial gurus advise keeping three to six months' worth of spending aside as an emergency fund (it varies, depending on who you ask). Of course, your account need not only contain an emergency money. Any other somewhat short-term savings, such as funds set aside for a down payment on a home or a trip, can also be placed in this account.

You'll need to make a budget that takes into account both your income and expenses if you're unsure of what that amount might be.

High-yield savings accounts give 0.6% annual percentage yield, which isn't spectacular but still a better location to park your money than a checking account, which normally offers less than 0.3%. (With savings accounts, the only drawback is that you frequently have a monthly withdrawal cap of six.)

There are other options, such as money market accounts or certificates of deposit, but they have limitations on how quickly you can withdraw the money and offer similar interest rates.

Think about putting extra money to work

Consider investing any extra money if you've amassed enough of a safety net to pay for emergencies and regular expenses. Saving money is different from investing in that you strive to expand your money by buying assets like stocks or real estate that appreciate in value over time.

Unlike saving, investing carries some financial risk, but the potential rewards are far higher. Inflation-adjusted returns on S&P 500 index equities have been around 7% annually, while returns on real estate can range from 8.6 to 10% annually. This is significantly more than the return on a 0.6% savings account. Visit this Lifehacker article for more information about investing.