How Much Cash Should I Keep in the Bank?

Everybody has an opinion on how much cash you should keep in your bank account. The truth is, it depends on your financial situation. What you need to keep in the bank is the money for your regular bills, your discretionary spending, and the portion of your savings that constitutes your emergency fund.

Emergency money has been particularly necessary in the coronavirus crisis, so your sense of how much you should have within easy reach may have changed. Even if you have an emergency fund, use the lessons of this situation to rethink what feels comfortable and necessary going forward.

Everything starts with your budget. If you don’t budget correctly, you may not have anything to keep in your bank account. Don’t have a budget? Now’s the time to develop one—or refine the way you’ve planned up to now. Here are some thoughts on how to do it.

The 50/30/20 Rule

First, let’s look at the ever-popular 50/30/20 budget rule. Senator Elizabeth Warren introduced the rule in the book, All Your Worth: The Ultimate Lifetime Money Plan, which she co-authored with her daughter. Instead of trying to follow a complicated, crazy-number-of-lines budget, you can think of your money as sitting in three buckets.

Costs that Don’t Change (Fixed): 50%

It would be nice if you didn’t have monthly bills, but the electricity bill cometh, just like the water, internet, car, and mortgage (or rent) bills. Assuming you’ve evaluated how these costs fit into your budget and decided they are musts, there’s not much you can do other than pay them.

Fixed costs should eat up around 50% of your monthly budget.

Discretionary Money: 30%

This is the bucket where anything (within reason) goes. It’s your money to use on wants instead of needs.

Interestingly, most planners include food in this bucket because there’s so much choice in how you handle this expense: You could eat at a restaurant or eat at home, you could buy generic or name brand, or you could purchase a cheap can of soup or a bunch of organic ingredients and make your own.

This bucket also includes a movie, buying a new tablet, or contributing to charity. You decide. The general rule is 30% of your income, but many financial gurus will argue that 30% is much too high.

Financial Goals: 20%

If you’re not aggressively saving for the future—maybe funding an IRA, a 529 plan if you have kids, and, of course, contributing to a 401(k) or another retirement plan, if possible—you’re setting yourself up for hard times ahead. This is where the final 20% of your monthly income should go. This funding is essential for your future. Retirement funds like IRAs and Roth IRAs can be set up through most brokerages.

If you don’t have an emergency fund, most of this 20% should go first to creating one.

Another Budget Strategy: Dave Ramsey’s Method

Financial guru Dave Ramsey has a different take on how you should carve up your cash. His recommended allocations look something like this (expressed as a percentage of your take-home pay):

• Charitable Giving: 10%
• Savings: 10%
• Food: 10%–15%
• Utilities: 5%–10%
• Housing: 25%
• Transportation: 10%
• Medical/Health: 5%–10%
• Insurance: 10%–25%
• Recreation: 5%–10%
• Personal Spending: 5%–10%
• Miscellaneous: 5%–10% 

About That Emergency Fund

Beyond your monthly living expenses and discretionary money, the major portion of the cash reserves in your bank account should consist of your emergency fund. The money for that fund should come from the portion of your budget devoted to savings—whether it’s from the 20% of 50/30/20 or from Ramsey’s 10%.

How much do you need? Everybody has a different opinion. Most financial experts end up suggesting you need a cash stash equal to six months of expenses: If you need $5,000 to survive every month, save $30,000.

Personal finance guru Suze Orman advises an eight-month emergency fund because that’s about how long it takes the average person to find a job. Other experts say three months, while some say none at all if you have little debt, already have a lot of money saved in liquid investments, and have quality insurance. 

Should that fund really be in the bank? Some of those same experts will advise you to keep your five-figure emergency fund in an investment account with relatively safe allocations to earn more than the paltry interest you will receive in a savings account. On the other hand, the recent months may have reshaped your thoughts on what feels “safe.”

The main issue is that the money should be instantly accessible if you need it. (And also remember that money in a bank account is FDIC insured).

If you don’t have an emergency fund, you should probably create one before putting your financial goals/savings money toward retirement or other goals. Aim for building the fund to three months of expenses, then splitting your savings between a savings account and investments until you have six to eight months worth tucked away.

After that, your savings should go into retirement and other goals—invested in something that earns more than a bank account.

How Much Money Should I Keep in My Savings Account?

How much money you should keep in a savings account depends on your budget. Savings accounts are designed to receive deposits, rather than frequent withdrawals. In fact, you’re generally allowed no more than six withdrawals a month from a savings account. They provide you a place to put money that is separate from your everyday banking needs—such as building an emergency fund or achieving a big savings goal like a dream vacation.

How Much Money Should I Keep in My Checking Account?

Checking accounts are designed to handle many transactions, such as paying bills or withdrawing cash you need on hand for daily expenses. The amount of money in your checking account should be enough to pay your monthly bills, withdraw cash for other expenses, and so that you don’t get hit with overdraft fees. It should also include a buffer. David Ramsey recommends that the amount of the buffer should make you feel comfortable, but also not be an amount that would tempt you to overspend.

The Bottom Line

Federal Reserve data from the 2017 Report on the Economic Well-Being of U.S. Households revealed that 40% of Americans said they would struggle to come up with $400 to pay for an unexpected expense. That doesn’t leave much room for saving.

Most financial gurus would probably agree that if you start saving something, that’s a great first step. Plan to raise that amount over time.