Why You're Keeping Too Much In Your Checking Account And What Is the Right Amount

Welcome back!  I read an interesting report this weekend on consumer checking.  The one page document called, Consumer Checking - Reflects the Times: High Average Balances Mean Difficult Economy, reports that the current average balance in people's checking account is $5,459.  As can be deduced from the title of this report, this amount is high compared to past years.  From 1994 to 2008, the "normal" average was about $2,000.  What was happening in our economy that lessened American's grip on their cash reserves during this time period?

Well, of course!  The average American was feeling rich back then because of real estate.  Why save cash when you can invest what you make in a subprime mortgage?  We all know how that played out.  Now it is obvious that people are frightened.  The average American doesn't invest in securities and that is probably a good thing right now.  Many of them don't have the credit to qualify for a home loan.  Rates on CDs and Money Market accounts have been pathetic for a very long time.  All of this to say:  Well, duh!

Where is the average American to turn to with the extra cash they save each month, beyond their monthly needs?  A retirement account!

First, lets qualify how much is too much to keep in your checking account.  If you have done leg one of your finances, keeping a budget, then you should know how much goes out each month.  Roughly $5,150 total goes out each month in expenses in my household.  To give ourselves a cushion, should we accidentally overspend, we keep an extra 15%, or a little over $700 in our checking account.  But I'm an aggressive investor and I have great credit.  Meaning, I deploy as much available cash on hand to buying equities in my various accounts.  I also already have two retirement accounts working on automatic, my teacher's pension and a 403b.

If you keep more than 20% of your total expenses as a reserve in your checking account, then you probably are saving too much!  As an easy example, lets say you spend $4000 a month on all things.  Let's also say that your take home is $5,450.  Keeping only $800 (20%) in your account, or $4800, means you can put $650 to work!

If you have an emergency, like your hot-water heater breaks, use some of that $800 and put the rest on a credit card.  The following month you can adjust, reduce, how much you will put aside for retirement or a high-yield savings account to cover the entirety of what you have left to pay on the hot-water heater, i.e., pay the credit card in full.  Now you've also kept your credit history from gathering dust.


I know many of you are barely getting by.  This article isn't for you.  This is for the majority of Americans, who apparently are keeping too much cash in their checking account.  Stop doing it!  If you're worried you will need the money, then at minimum place the extra savings in a high-yield money market account.  You can withdraw what you need and have it available to you within a day or two.  A six-month CD is an alternative for people who are more comfortable with their situation.  Finally, a Roth IRA is the perfect place for anyone who doesn't have a retirement account and wants their money available to them at some point.  Cash contributions can be withdrawn penalty free from a Roth IRA.

If you want to read the report, you can find it here: Moebs Services Study on Checking Accounts.  Don't miss out on higher returns elsewhere worrying about the future.  Fear is the enemy of living and risk-taking.  So stop listening to your inner cautious voice and take action.  You'll soon be on your way to becoming rich.

Thanks for reading.  See you next time.