How Much Should You Have In Your Checking Account?

How much cushion do you like to leave in your checking account? You know, the money you try to balance down to instead of zero. In the past, I have simply tried to keep a few hundred dollars in my checking account to avoid overdraft fees.

I’ve recently discovered the beauty of declaring a specific amount in checking as the equivalent of zero, and basing our budget on that amount. For instance, if $500 feels like a comfortable cushion for you, then you should save $500 in your checking account and do not spend below this amount.

If at the end of the month your balance is $528.31, then move $28.31 to your savings account and start with exactly $500.00 as your balance heading into the next month. It’s a quick way to see how successfully you are budgeting without worrying about dropping below zero.

The Frugal Roundup

How I Ruined My Credit Score, and How It Didn’t Ruin My Life. If you haven’t heard, J.D. from Get Rich Slowly is featuring reader stories every Sunday. I really enjoy reading them and this particular one was a great story. (@Get Rich Slowly)

Frugality On a Whole New Level. Here’s a quick article on taking frugality to the extreme. How extreme have you taken frugality? (@Budgets Are Sexy)

The Definitive Extended Warranty Litmus Test. Len Penzo created a nifty looking chart to help you decide if an extended warranty is worth it.  (@Len Penzo dot Com)

How to Apologize For an Error? Martyr Yourself. Here is an interesting approach to handling errors you may make at work or in life. (@Financial Samurai)

$365 a Year for Food. Think you could feed yourself on a dollar a day? Might be a stretch for even the most frugal of us. Then again, when broke you do what you have to do. (@Smart Spending)

Best of the Rest

Comments

  1. I first got into budgeting through the YNAB site, so I’ve always stuck with his fundamentals, which means that at the end of the month, I have all of the income earned during that month, which I then use to budget for the following month. It’s obviously a lot of money to have in a checking account, and I’m sure I could move it to savings and pull it back as needed, but the interest lost is minimal, and this works for us.

  2. My checking account cushion is zero. I have allocation sheets when my paycheck comes in and my wife and I go on the envelope system so not debit cards are needed and the money is already out of the bank and cash in the envelopes. So any money in the bank account is actually just a check that has already been written but not cashed or deposited by the recipient. I keep a google doc of all checks that havent been cashed just to ensure that the amount on the google doc and the bank account match.

  3. I do not purposely keep a cushion, but I do run on a zero based budget. If you don’t spend more than you make, you’ll never need to worry about a cushion since you’ll never overdraw you account.
    I usually do end up with some extra at the end of each month, and that amount I just let sit in the checking account. At present I’d guess I have around $800 extra sitting in checking leftover from months of living below my means. Savings and money market rates are too pitiful today for me to be too concerned about transferring an extra $50 out. If I were to get upwards of $1000 extra, I’d probably move some extra over into my Roth IRA.

  4. It drives my wife crazy, but I never let the checking account balance go below about two paychecks’ worth. It represents the first month of our “emergency fund” and means that we have never, ever, had an overdraft charge, even when there have been some problems with autopay firing twice on mortgage payments, etc. Peace of mind for a few bucks a month…

  5. Zero cushion – because I take the opposite approach…. All my checks go into savings or investment accounts, then I take out only the amount that I will need for the month and put it into my checking account. My checking account is only for paying the regular household bills – utilities, gas, groceries, etc. The rest of my money is earning me money somewhere else.

  6. I used to keep a checking account cushion by rounding. When I’d make a debit card or check purchase I’d round the amount up. So instead of $5.67 I’d enter $6. When we moved this past December we had about a $700 cushion after 4 years. I decided to stop that practice when we moved and had to set up a new account because I found it to be a pain to reconcile. We do not have a cushion in our new checking account. However it is tied to a savings account that provides overdraft protection. If we were to spend more than we had in our checking account it would just be drafted from the savings account. I put a little money into that account every paycheck. A lot of our spending is cash though and I keep a regular check of debit purchases so I know what we have available. I do like the system you suggest of decaring a certain balance as zero and then transfering the extra to savings each month.

  7. Im a YNAB man myself. Living off last months paychecks. Our monthly budget is 3500, so at the beginning of the month I have at least that much. Also, within two weeks we get paid, so after the first round of bills (which because of YNAB I don’t really care when they come in) I usually get down to about 1000, but then I get paid and have that buffer built back up.

    I also do the savings thing. If we get paid extra from overtime or those 2 extra paychecks a year from being paid every two weeks, that is budgeted into savings, usually an EFT.

    We are also trying to get a CD ladder set up so every 3 months a CD expires and we have 3 months cash sitting in an easy access savings account like ING. If something big comes up, we can usually spend cash (if its less than 1000) then transfer it in after a couple of days. If its REALLY big, we can charge it and transfer in that cash and pay off the card immediately.

    with YNAB, there is no real need to discuss a minimum. I cannot possibly imagine a scenario that would lead to an overdrawn account

  8. YNAB’r here – so one month’s income … plus a few sinking funds that are tapped regularly are kept in checking so I don’t have to hassle with savings transfers.

  9. I leave $1000 cushion in our brick-and-mortar checking account and $1000 cushion in our ING Direct checking account.

    I use a self-made zero based budget, so all of our money is accounted for, but I like having a cushion in case extra expenses pop up – like when Chase accidentally drafted out my mortgage of $900 twice last November and took 3 weeks to fix the problem. I wasn’t too stressed since we had the cushion anyway.

  10. Our “cushion” is forever changing. I guess I’m doing a “zero” budget but not in a formal way.

    When we get paid, whatever the balance is in the checking account from the previous pay period is transferred to savings. I routinely move $2K-$2.5K to the savings each month when the new paycheck hits. (We also have money automatically diverted to savings over & above the balance transfer.)

    With the advent on online banking, we can transfer money back/forth to checking/savings which has caused us to keep a lower cushion in the checking account.

  11. I earn more than I spend and I have my paycheck direct deposited, so I’m not worried about a deficit in my checking account. The question then becomes how fast should I move money into my brokerage account. Currently I average about a $3000 balance and I feel uneasy if it drops below $1500. I suppose I could shift the numbers to average $2000 and maintain above $500, but I’m not sure $1000 X (BND @ 3.5%) = $35/year in additional income is worth my piece of mind in this case.

  12. I keep my cushion at $1000. It is the first part of my emergency fund, that way if I need new tires or something I don’t have to do any work to get at my emergency fund. If it is a bigger expense then I have to go to the savings account.

  13. We run about a $300 cushion. We use the Dave Ramsey envelope system, but instead of down to zero, we keep that $300 and that works for us quite well.

  14. I like to go all the way down to between $100-$200. Sometimes I get down to like $70. Why? Every month that there is still $500 left in my account, that is at least an extra $300 that I could have put towards my debt, saving me that much more in interest payments.

    I’ve been doing this as long as I can remember and have never had an overdraft fee.

  15. Thanks for the link love my friend :)

    As for checking, I usually keep $100 in there – just in case I need some fast cash within the 2 week period before payday again. Sometimes I have more (it used to be $1,000 constantly) but I’d much rather see that $ building up in a savings/money market than in the checking. They want to go and play with all their friends!

  16. I never let it drop below $1000. As a result we never pay any bank fees. This is also part of my emergency funds. In an emergency I won’t worry about incurring the months bank fees. I have my Excel spreadsheet set up to calculate the rolling balance of every planned expense and incoming paycheck. In the column showing the balance after each item, it’s set to turn yellow with the balance drops below $1200 as a warning. Dropping below $1000 turns it red. Every Friday I update all my predicted spending with the acutal numbers for the week and then test different amounts to see how much I can skim off without sending a future balance below $1000. That amount gets sent off to retirement savings or an extra mortgage payment. Every week I repeat this process and assess how much “excess” there is to be moved out without dropping the balance below $1000.

  17. I like to keep it around 10K. We are both paid biweekly so our paychecks hit at odd times compared to when our bills are due. This way we never get hit with fees.

  18. I don’t think in terms of a “cushion” – I just keep track of everything out and everything in, and there is abosutely zero chance of any kind of overdraft fees. I’m not sure how one could be so careless as to write checks for money that’s not there? Further, my credit union does not charge any minimum balance fees, so that’s never a concern.

    I’m with myfinancialobjectives (#14) – any extra money each month gets sent to my mortgage holder and takes me that much closer to financial freedom.

  19. My checking account is actually a rewards checking account, earning about 4% right now. It’s my “hub” account, but also a makeshift e-fund for the time being.

    I kinda play a game with myself. Every month I increase my cash cushion by $50. Currently, I have a cash cushion of $800. Not a lot, but it’s growing.

  20. I’ve used $1000 as the zero point in my checking for the past decade. I’ve never been able to maintain a good budget (wife – are you listening?) so this keeps me out of hot water with the bank if the balance drops below my minimum. I’m excited about YNAB after reading all the other comments, now. I’m going show my wife and get her to buy into the idea. I see nothing but positive things with YNAB’s concept. Thank you for being here Frugal Dad!

  21. At Main Street Financial FCU. If you’re looking to join, it’s a local CU and you must live and work locally.

    There are a quite a few credit unions that are offering roughly 4%, if you know where to look…

  22. I try and keep as close to $0 as possible at any given point in my checking. $0 in the sense that after expenses, it goes down to $0 for the majority of the month.

    Thanks for highlighting my martyr article!

    Best, Sam

  23. I don’t have any specific cushion, instead all the savings I had for the monthly bills, I kept it there. Aside from the SA I have. It serves dual purpose for, for paying bills and emergency fund. The SA, that’s what I really don’t spend.

  24. I am starting this idea at about $200 but hope to increase to $500 after a few months and finally start getting some savings behind me too.

    Thanks for the roundup as always.

  25. My husband and I practice this on a regular basis. It really helps keep our savings on track as well as our spending. On those months when we have had bonus we usually shift it to our recreation savings. It is amazing what we have been able to buy using cash due to this. Thanks for a great post!

  26. I don’t usually keep a cushion in my checking account. I don’t usually have any problems. I balance my check book to the penny and know what I have in there.

    I try to spend cash on stuff I can’t send a check too, so I don’t have to worry about forgetting to subtract a withdrawal.

    Also I don’t pay bills with checks until everything I have deposited clears. I actually wait ten days for most checks I deposit to clear (I have had clients checks bounce.) This really saves me.
    The bank will make funds from a check available, but if it bounces will take that advance back and charge you a fee as well, so if you wrote a check on that money it is your fault, that is why I wait the ten day now.

    I keep my emergency fund and savings in ING, I find they have the best interest rate. In addition I have three checking accounts:
    my business account (I am self employed)
    my personal account
    my freedom account

    All these are at separate banks so I can’t transfer money from one account to another, it helps me to keep things separate easier. It may sound a bit crazy, but I have no debt (except my motgage), have $1,000 emergency fund, have money to get my roof replaced, and $9,000 to live for next 9 months (in case I don’t work since I am self employed.)

    I also put 20% down on a house I bought in Nov.

    God is so good!

  27. I don’t have a hard and fast rule, but I always get a bit nervous if the number dips below $100.

    Thanks for including my post, Dad! ;-)

    All the best,

    Len
    Len Penzo dot Com

  28. Under normal circumstances we keep about $200 extra in our checking account. The rest goes into our emergency fund or as extra to pay off debt. If we spend less than expected during the month, then anything over the $200 goes towards debt payoff.

    Unfortunately, circumstances have not been normal since my husband lost his job in October 2009, so we had much more in our checking for quick access to pay the bills. Thankfully, he starts a new job in April and we’ll be going back to our usual practices! Yay!

  29. My cushion for my chequing account is $100.

    Every pay day, I take a look at the expenses coming due in the next two weeks, and make a transfer in, or transfer out, so that my ending balance will be $100. Most of my purchases are on credit card, so that amount easily covers any sundry items I want to put on debit, or if I need to get a roll of loonies for the laundry machine.

    Money not needed for immediate bills is sent first to my regular savings account (if its balance is under $1,000), and next to my TFSA. My cash flow is such that the majority of the time, I’m sending money off to the TFSA. I haven’t yet had to pull money back from there.

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