In the United States, checking accounts are the backbone of personal finance. According to a new GOBankingRates poll of over 1,300 individuals nationwide, more than 95% of Americans have a checking account, the greatest number of any account type.
However, more than a third of individuals questioned report having no money in their bank account at all.
GOBankingRates spoke with experts who were astounded by the study’s conclusions as those who believed it was accurate. The amount of cash that money specialists believe is necessary to have liquid and accessible in a checking account.
A Hundred Bucks?
The survey discovered that 35% of the country’s more than 1 in 3 Americans have to check accounts with less than $100 at any one moment.
Consider that the next largest category, the 18% with balances between $101 and $500 or $501 and $1,000, was just nearly half the size.
Around 11% of the country’s population has a magic number between $1,001 and $1,500. A little less than 6% retain up to $2,000 in checking, while around 13% keep more than that.
If you believe that a double-digit account balance is inadequate for one-third of the nation, you are not alone.
“It honestly astounds me that the figure is so low,” said Julie Ramhold, DealNews’ consumer analyst. “I would anticipate that many continue to deposit the majority of their money in a checking account.” Therefore, if $99 or less is considered inexpensive, what is the sweet spot?
“In a nutshell, most experts recommend that you retain one to two months’ worth of living expenditures in your bank account,” Ramhold said. “It’s also a good idea to add 25% to 30% of your monthly living expenditures as a buffer.”
Less Is More
Not all specialists were taken aback by the study’s conclusions; in fact, at least one believes the findings are accurate. “I maintain a balance of less than $100 in my bank account for a variety of reasons,” Wendy Barlin, CPA, said.
The first argument favoring maintaining an ultra-low balance is that checking accounts yield no interest or very little income in the best-case scenario, but Barlin made an equally compelling justification.
“Checking accounts are connected to debit cards, the primary source of fraud,” Barlin said. “I’m not comfortable with someone withdrawing funds from my checking account; I keep all of my funds in a savings or money market account.”
After all, it is much simpler to convince credit card companies to reverse fraudulent charges than to convince banks to repay the money.
The Right Amount
As you can see, the range is quite large, ranging from $99 to two months’ worth of living costs plus 30%, and that’s after consulting with only two specialists.
According to some, you should have up to six months’ worth of supplies on hand. Unanimity is rare since each individual’s life and financial impact are unique.
“How much money you should retain in your checking account is determined by a variety of variables, including your income and anticipated spending, periodic bill payments, and cash withdrawals,” said personal finance expert Laura Adams, MBA.
Another reason determining the “correct amount” is so difficult is the transient nature of money stored in checking accounts. Checking accounts serve as a temporary holding account for funds that will be used to pay credit card payments, fund investment accounts and IRAs, and settle up with the mortgage lender for the month.
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“The majority of consumers deposit money into their checking account and use that account to pay for daily bills and savings,” Adams said.
According to one school of thinking, the appropriate quantity is necessary to meet your costs and nothing more. After all, whatever remains may be put to greater use elsewhere.
“Because bank account interest returns are generally a fraction of a percent, putting big money in a checking account is not a prudent choice,” Adams said. “By reinvesting extra funds in higher-yield savings accounts, you may earn more interest while still maintaining a separate emergency fund.”
There is even a case to be made for investing that money in an index fund since savings returns are not much higher than checking yields, but if you are a checking account minimalist, keep in mind that having a little too much money is preferable to having too little.
The Price Trap Waits for Those Who Cut It Too Tight
While you don’t want to have too much money in checking when it might be making you money elsewhere, having a good cushion of cash is critical if you want to avoid the large fines associated with having an underfunded checking account.
“As a general guideline, your objective should be to maintain a level that keeps you from becoming overdrawn or paying bank penalties,” said Maxim Manturov, head of investment research at Freedom Finance Europe, a subsidiary of Freedom Holding Corp., which is publicly listed on the Nasdaq.
“With this in mind, your account should never go below the minimum needed level; thus, it’s critical to plan your spending and monthly outflow properly.”
Use Savings as a Failsafe, But Just Sparingly
Perhaps one reason individuals have such little balances in their checking accounts these days is that low balances are no longer as risky as they previously were.
Most banks allow you to move money rapidly between savings and checking accounts if your finances get tight, even after hours. You may enable overdraft protection, which automatically transfers funds from savings to checking to cover an ongoing debt.
These are all quite useful instruments that, a generation ago, would have looked like magic to anybody who had ever written a check they didn’t understand they couldn’t cover.
However, unlike checking accounts, savings accounts are not intended to be temporary. That money is meant to remain in the savings account, and if you use it excessively as a backup for your checking account, you will begin to face fines.
It is because Federal Reserve Board Regulation D prohibits you from withdrawing more than six times a month from your savings account.
The Nature of Banking Is Transforming
According to the GOBankingRates poll, the oldest Americans, those 65 and over, were much more likely to have bigger checking account balances and far less likely to have low balances than all other age groups, with younger generations heading in the other way.
Not just because twentysomethings have less money than their elders, but also because technology has created a generational difference in banking habits and views.
In an age of cryptocurrency wallets and Venmo, paper checks and the accounts to which they are tied have a very twentieth-century vibe. Many young people have never written a check and, more importantly, have never balanced a checkbook using longhand math, which has become the financial equivalent of cursive.
While older generations value the security of having a large amount of cash “on hand” in their bank accounts, newer generations value having all their money on hand at all times.
Why should they be concerned about the amount in their checking accounts when they have 24/7 access to PayPal, peer-to-peer payments, purchase now, pay later buying choices, and virtually rapid transfers from brokerages to banks?
“As the information age progresses, individuals are becoming more knowledgeable about their financial wellbeing,” said James Dunavant, CEO of personal finance platform Tend.
“Naturally, their tastes are evolving toward more transparent platforms that provide services that are quicker, easier, and more tailored.
Rather than putting their money in a checking account, people seek alternatives that provide better convenience, faster processing, more incentives, or less hidden costs.
The next generation, in particular, has a greater grasp of the variety of financial instruments accessible to them, and they are ready to do more study to place their money in the most appropriate money management services, platforms, and applications for their unique requirements and aspirations.”