Checking or savings?

Staff

The answer here concerns budgeting. Given the low to no-interest rates earned in checking accounts, you want to keep the minimum amount possible/comfortable in your checking account.

Try to assess how much you spend on an average month and when. You can do this with a budgeting tool like Quicken or with a good ole spreadsheet. Put that together and look at your cash flow for a few months to get it steady.

Make sure that you have enough in to pay bills when needed, then give yourself a little cushion (say 10% to 20% of monthly spend). The next nearest money should be in a savings account or high-yield money market - something with a 2-3 day turnaround to fund your checking, but doesn't require selling investments.

There's no golden ratio on the checking or savings split. The numbers to watch are more in your % of overall investments.

Guru

Ari makes a good point about keeping as little money as possible in low-interest checking accounts. Two follow ups on this.


First, many banks will allow you to provide "overdraft protection" on your checking account, such that savings balances can be automatically transferred to a checking account when needed.

While some banks charge fees for this service, many do not. The only issue you have to watch here is that most savings accounts must comply with federal "Reg D", which requires that no more than six withdrawals a month come out via certain methods (including overdraft protection). If overdraft protection is used only occasionally, this won't be an issue.


Second, you might consider a "rewards checking" account as an alternative to a traditional checking/savings split. If you meet the qualifications for the "rewards rate" in one of these accounts, you'll earn much better rates on your entire balance than you will in a savings account, and you'll never have to worry about any "Reg D" type limits.

An asset management account at a brokerage will also allow a savings-like rate of return on what is essentially a checking account, without the requirements of a rewards checking account. Fidelity and Etrade offer good examples of these accounts, and both of these are referenced on the FiLife web site.