Turns out the rule of thumb for minimum amounts in checking balances is outdated.Denys Prykhodov/Getty Images/iStockphoto
How much money should you keep in your chequing account these days?
It’s a question I started asking recently after getting an alert from my bank. I had hit my minimum set balance – an amount that added up to several hundred dollars.
Although I of course have funds parked elsewhere, the alert was embarrassing. But the more I probed my money-minded colleagues, friends and, of course, strangers on the internet, the more I realized the issue is more common than I thought.
Hear me out.
Banking isn’t what it used to be a generation ago. Fintechs were sparse and Canada’s big banks dominated the scene.
And while big banks often have minimum requirements when it comes to their chequing account balances, plenty of fintechs today do not. Canadians also have more places to park liquid savings, such as the popular Tax-Free Savings Account (TFSA). Bill payments can be automated more seamlessly so money doesn’t sit idle for long.
The stock market – recent turbulence aside – has been on a heater with the S&P/TSX Composite Index still posting double-digit gains since the start of the housing downturn. Meaning, many of us are inclined to limit how much of our funds are parked in accounts that usually earn near-zero interest.
And yet, we still often play by outdated rules. Traditional chequing accounts at big banks don’t earn any interest – as in zero – so banks can borrow your money cheaply.
A post this week in a Canadian Finance subreddit asked users how much someone should keep in their “chequing/savings” account (already a red flag). The top-rated comment suggested that renters with a stable job should hold three months of expenses in a chequing account, with the number stretching to six months for those with a mortgage or kids – and 12 months for sole earners in the household.
When I brought this same question to a handful of finance experts, most landed on a much lower figure.
“I tend to keep as little as possible in my chequing account so that my money is working for me,” said certified financial planner Jason Heath. “If you were fully optimized, you might have $1 in the bank the day your paycheque is deposited.”
Of course, plenty of people need to have more in order to be able to sleep at night, he said. But part of the worry might also stem from treating your chequing account as a place to park your emergency fund.
An old personal finance rule of thumb is to have enough liquid cash to cover between three and six months of household expenses, primarily for emergencies.
Tax-Free Savings Accounts (TFSAs) have allowed Canadians to make more flexible withdrawals for the past 17 years. For major emergency savings, Mr. Heath said a home equity line of credit, for those who own a home, or a TFSA can also do the trick.
A high-interest taxable savings account might work better for those who feel they’d lose out on valuable contribution room in their TFSA, which is best used for long-term investing, said Jessica Moorhouse, a Toronto-based certified financial counsellor.
But as far as chequing accounts go, her advice is having $1,000 – $2,000 in buffer money. “At the most, one month of expenses.”
Finding a sweet spot is about remembering what a chequing account is really for. “It’s there to make sure you don’t bounce a cheque,” said Adam Chapman, a CFP at Yes Money in London, Ont.
Calculating a month of regular bills that need to be paid – utilities, car payment, rent, credit card balance – and making sure they’ll be covered in a way that aligns with your paycheque date is enough for many of us.
If you’re someone with commission-based work, worry about job security or simply would stay up all night tossing and turning without the peace of mind, two months of bills might be more reasonable, Mr. Chapman said.
But remember: Your chequing account isn’t your emergency fund. And there are many banks that don’t set a minimum balance or charge monthly fees. You can also ask your own bank to waive these fees if they do come up (which I did), or ask about switching to a no minimum balance account.
So how much do you keep in your chequing account? Tell us by dropping a line at mpostelnyak@globeandmail.com or filling out this short poll.
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