Where to hide the money?
September 19, 2009 7:15 AM   Subscribe

How can I figure out the minimum amount to keep in my checking account?

Basic financial stats: I pay for everything I can (including bills) with my American Express for the cash back bonus. A few utility bills are withdrawn from my checking account, as well as rent. I pay my CC bill from checking, and my paycheck is deposited there. Income > Expenses.

My only debts are student loans (at such a low rate that I have no intentions of paying it off early), and about 4k left on a car loan that I could probably pay off now if I wanted to.

I'd like to make the most out of my savings account, though, and even though I feel like this should be easy, I can't figure out how little I need to keep in checking. Is there an easy way to figure this out? I know I can move some money to savings now, but I'd love a formula to figure out how much that should be (in addition to the money that I have automagically transferred every month).

Side question - should I put this extra money towards my car loan instead so that I can start saving even more each month? The interest rate on the car loan is between 5-6% if I recall. Online savings is with INGDirect which is somewhere around 1.4%.
posted by odi.et.amo to Work & Money (11 answers total) 6 users marked this as a favorite
Unless you have a requirement for extra liquid capital (such as if you're freelance or have the potential for becoming rather poor rather quickly) pay off that car loan. Getting 1.4% on the 4k and continuing to pay 6% interest to the finance company means you're losing money each month.

On the checking account question, I tend to keep between 1-2 months of full expenses in it (so about $3000-$5000 in my case). This means if I get paid on the wrong week or expenses come out earlier than expected, I'm covered. Likewise, it acts as a very short term emergency fund of sorts (though I have a separate one too) in case I have a lean month. Working this way, I never need to touch my savings unless I have a mega purchase. A lot of people I know do something similar except they have an overdraft equivalent to a month's expenses.. but if at all possible, avoid this for obvious reasons.
posted by wackybrit at 7:24 AM on September 19, 2009

If the interest you accrue on a loan is greater than the interest you would earn on savings, you should make paying off that loan the priority.
posted by dfriedman at 7:24 AM on September 19, 2009 [2 favorites]

My "system", if such an informal thing can be called that, works like this:
  • My desired chequing account balance is enough that even if all bills arrive at the worst possible time compared to bi-weekly pay, my balance wont drop below a comfortable level. For me this means I like to see about $5K in there at the most, and never less than about $1.5K. Credit card bills always get paid right away--I try not to look at these as debts to be repaid later, but just as another expense that has to be paid now.
  • Chequing account funds in excess of the desired amount go into the savings account right away. I look at my bank balance every time I get paid and skim off this "excess" to my savings account, if there is any. This is kind of a psychological trick to help me avoid spending too much money just because it's there to spend.
  • When my savings account has filled up enough that I'm comfortable I could live on it for a while if I lost my income, then I start to put the excess funds into paying off loans faster. Although this isn't the optimal strategy for having the most money in the long term, a slightly more paid-off loan doesn't seem like something I can buy food with in the absence of income.
The way I arrived at the $5K amount as the upper limit for the chequing account was to add up all the recurring bills, a couple of weeks living expenses, and the typical size of any large purchases I make, and then add a couple of thousand for safety. Over about the last 11 years, this has worked out pretty well.
posted by FishBike at 7:44 AM on September 19, 2009

Like you, we pay as much as possible on CCs, and so our checking account *minimum* safety margin is equal to the "worst week" of the typical monthly payment cycle (mortgage payment week). The minimum cushion is the mental point where you say "oh crap, checking account is pretty low" and start watching everything very carefully to make sure nothing bad happens. We strive to keep at least 2 weeks' in there, and when it gets to be more than 1 month's expenses is when it triggers talk of skimming off extra to savings. Remember that keeping an extra couple thousand in savings on average only costs you about $25 in interest a year, which is a small price to pay for peace of mind.

There are lots of different formulas for determining the size of your emergency fund. In "these uncertain economic times," I'd err on the side of caution, and suggest that if you don't have at least 3 months' of barebones living expenses in your liquid savings, don't pay off the car loan completely until you do.
posted by drlith at 8:33 AM on September 19, 2009

My system is similar to FishBike's, although I don't keep so much in checking because I have a short-term interest-bearing savings linked to my checking account. That's where I keep cushion money in case of overbilling (which you have to pay a peice of in "good faith" even as you start fighting back) and underpaying (which hasn't happened with my current employer.)

I pay all my usual bills with a credit card for the safety features and benefits. Nothing is autobilled - I pay online. When my paycheck clears, I pay the current balance on that card, the balance on any other cards I might have used in the last two weeks, push to my linked savings to keep the balance at a few thousand if I need to, leave $500 in checking, and then put the rest away.

My checking is used for walking around money, basically, and I have to write actual paper checks to pay for my horse's board, the farrier, and the vet.

I also use the linked savings if I am socking money away for a vacation or a special purchase.

In my case, my biggest concerns is not having money I can honestly get my hands on. History has taught me that my family can guilt me out of, and it will not be paid back. If I can't get to the money, they can get it from me.

(And, FWIW, I once worked for a large well-known software company that screwed up my paychecks and expense checks and direct deposit schedule constantly, and always in their own favor. And I don't mean expenses were questioned - I mean approved expenses that according to the web site would due to me on X date.)
posted by Lesser Shrew at 8:35 AM on September 19, 2009

One option is just not to worry about keeping a perfect minimum in your checking account. Let's say you don't know whether to keep $1000 or $5000 in your checking account and that your savings account pays 1.5% while your checking account pays 0.5%. The difference in these two cases is only $40 per year. Is it worth obsessing over your checking balance for $40 per year? How valuable is your time? Make a mistake and one overdraft will wipe that out. Just keep a healthy surplus in your checking account then relax and enjoy the important things in life.
posted by JackFlash at 9:52 AM on September 19, 2009 [1 favorite]

My forty cents....

Good question to ask.

0) Keep enough in reserve, in your main checking/current account, to handle a couple of month's expenses in total *minimum*. Avoid ever going below that amount. If you feel that seems like a lot to just leave laying around - just consider how many months in your life you'll be working and saving - it's not that much, and it's a heck of stress releivler. Do this and you will almost never, ever worry about what day payday is. I say checking account - really I just mean somewhere easily accessible if you need it without penalty. If you can keep the 2 months extra in a "savings" account with slightly higher interest but still dip in with no penalty now and then, go for it. Keep a big, fat cushion at all times. You'll be giving yourself a silent, selfish, ego-boosting pat on the back over and over agian when you listen to other people compain about getting paid a day late or a couple hours missing off their paycheck, and so on.

1) Pay off all loans unless you are earning more interest on your money than they are costing you (which I've never seen and be curious to hear about!) Debt is bad, stay out of it.

2) Regarding the student loan - I don't know the deal there, but even if the interest is nothing and you aren't under pressure to pay - I'd still pay it off. It's a debt you owe, and some day, you might suddenly care a lot more about it. Consider the psychological implication of living debt-free - in my book, it's a big boost not to owe money to anyone, for any reason.

2) Savings account - here you need to think "income producing plan" - not just "savings account". This is your long-term place hwere you put money ot make you more money. If a saving's account is the only investment you are comfortable with, that's okay! But this is where you have the opportunity to put money to work for you. The day you can make this balance earn you enough profit monthly to cover your monthly expenses - you are wealthy. You can quit your day job.
posted by TravellingDen at 10:06 AM on September 19, 2009

I actually tend to keep very little extra in my checking account. Even though I put all of my spending on my credit card, if I check my balance online and see that I have $2k in my account, I tend to spend more, even if I know that the $2k is my emergency money.

I have a detailed budget. My paycheck is direct deposited into my savings account, and I transfer money into my checking account from my savings only as it is actually needed. All of my bills (cell phone, cable, etc.) are charged to a credit card. So, the week I pay my rent, I transfer my rent amount into my checking account. When my credit card closes for the month, I transfer the amount of the payment (in full) into my checking account and then pay it off in full as soon as the money drops. If I don't have any bills coming up, there's usually $200-400 in there, so that I can get cash if I really need it. Any more than that makes me antsy and liable to overspend.
posted by decathecting at 10:31 AM on September 19, 2009

I have a separate current account for bills. I know how much the bills are each month, and I transfer the right amount over automatically after payday plus about 25%. When the extra starts to accumulate I spend it on one-off household expenses.

This means that as soon as this single payment has left my main account, everything else is mine to transfer into savings or spend however I see fit. If I spend it all a week before payday, I can still be certain that the bills will be paid.

My overdraft is enough to cover that single payment in the case that I haven't been paid on time; but this has never happened yet.
posted by emilyw at 11:44 AM on September 19, 2009

I'm impressed. $1.5K balance? You folks are not living close enough to the edge. Turn in your artsy bohemian credentials immediately. Here's the hand-to-mouth version: I make sure my balance never drops below $300 (yes, three hundred); I don't do any direct payments just in case-- I write old-fashioned paper checks twice a month on payday and send them by snail mail (you have to pay everything 10 days in advance if you do this; they don't call it snail mail for nothing). Three hundred seems about right. If it goes lower than that and you have an emergency you're really stuck.

Some banks give you overdraft protection if you have checking and savings accounts; they will simply pay overdrafts out of savings, then charge you a much much lower fee for the privilege, and saving you both the overdraft fee at the vendor end and the credit report hit. Not that I've ever, um, needed that.
posted by nax at 3:21 PM on September 19, 2009 [1 favorite]

I was definitely looking to figure out how to live "closer to the edge" as it were... but I suppose my current method of "this extra money has been around for a while, I should move it" will do the trick. I'll also slowly increase the amount of money I automatically transfer to savings over time to see if I can maintain a balance that way.

The savings account is purely emergency/fun-things-fund (fun-things once I'm comfortable with my emergency amount). I have a 401k for proper savings.
posted by odi.et.amo at 5:01 PM on September 27, 2009

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