If you've ever been strapped for cash, you might feel more comfortable keeping large amounts of money in your checking or savings account. After all, that means it's easily accessible. But there's such a thing as having too much money in a liquid form. That's money that could be used for investments. So how much money is too much to have in cash?
How Much Money Should Be in Your Checking or Savings?
Checking accounts and savings accounts differ in two ways. The first one is purely financial: savings accounts give you more interest. The other is more practical: your checking account is your "spending" money, your savings account generally shouldn't be touched (unless absolutely necessary).
As a rule of thumb, you should have about a couple months' worth of expenses in your checking account. This prevents you from having to regularly transfer money into your checking account from savings.
Your savings account should have about three to six months of savings. But that's a pretty broad amount. What determines exactly how much you should have?
How Much Is Too Much to Have in Savings?
There are different rules. Decades ago, about six months of income was considered to be about right. Today, you really only need six months of savings if you believe that you're in a delicate situation — if you might be laid off or may find it difficult to find work if you are laid off.
Most people find it more reasonable to have about three months of income set aside. This is enough to be able to find another job at a reasonable pace, which is what your savings account is for: unexpected expenses.
What About Hybrid Accounts?
Hybrid checking and savings accounts are also becoming popular. They have high interest rates but still function as checking accounts. If you decide to use one of these to streamline your spending, you should keep at least four months of expenses in it; one month for your regular bills and three months for extraordinary bills.
So, where should your money be going if not checking or savings? Generally, it should be going to your retirement accounts. Your 401(k) or your IRA will be able to accumulate value at a far higher rate than either your checking or savings. If you still aren't sure what you should be doing, you should consult with a financial planner. A financial services company can help you plan for your goals.