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 everyone needs to keep in the bank from month to month is enough to cover the regular bills and discretionary spending, and a bit over for an emergency fund.
In addition to keeping funds in a bank account, you should also keep between $100 and $300 cash in your wallet and about $1,000 in a safe at home for unexpected expenses.
Everything starts with your budget. If you don't budget correctly, you don't know how much you need to keep in your bank account.If you don't have one, now’s the time to develop one.
Key Takeaways
- The 50/30/20 rule and financial guru Dave Ramsey’s method are two popular approaches to budgeting.
- Both recommend allocating money monthly to regular monthly bills, discretionary spending, and an emergency fund.
- All of these should be kept in "cash." That means a checking account that allows you immediate access to your money when you need it.
The 50/30/20 Rule
First, let's look at the ever-popular 50/30/20 budget rule.
Senator Elizabeth Warren introduced this 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: 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.
Granted, not all of these costs are fixed. Electricity costs, for example, change with the seasons. But you should get a good sense over time of approximately how much you'll need to cover the expense every month.
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 not because eating is discretionary but because the costs vary so widely depending on your habits and preferences. You can eat at a restaurant or cook at home, you can buy generic or name brands, and you can buy flank steak or prime rib.
Whatever you choose, list it under discretionary, at least as a constant reminder that you can cut back on the fine dining if you're busting this part of your budget every month.
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 argue that 30% is much too high.
Financial Goals: 20%
If you're not aggressively saving for the future—funding an IRA or 401(k), a 529 plan if you have kids, 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. This is the accessible cash that you can turn to when the roof falls in, literally or figuratively.
The percentages of the 50/30/20 rule should be applied to your after-tax income, which is your take-home pay.
Another Budget Strategy: Dave Ramsey's Method
Financial guru Dave Ramsey has a slightly 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 method or Ramsey's 10% estimate.
How much do you need? Everybody has a different opinion. Most financial experts suggest 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, a lot of money saved in liquid investments, and good-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.
The main issue is that the money is instantly accessible if you need it. And there's virtually no risk of losses if the money is in an FDIC-insured bank account.
If you don’t have an emergency fund, you should probably build one even before putting your 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—investing in something that earns more than a bank account.
How Much Should I Keep in Checking?
Checking accounts are designed to handle everyday transactions, such as depositing paychecks, paying bills, and withdrawing cash for daily expenses.
The amount of money in your checking account should be enough to cover the bills and the daily expenses 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 not so comfortable that you're tempted to overspend.
How Much Cash Should I Keep on Hand?
We'll interpret "cash on hand" as money that is immediately available for use in an unexpected emergency. That should include a little cash stashed in the house, enough to cover the monthly bills in a checking account, and enough to cover an emergency in a savings account.
For the emergency stash, most financial experts set an ambitious goal at the equivalent of six months of income.
A regular savings account is "liquid." That is, your money is safe and you can access it at any time without a penalty and with no risk of a loss of your principal. In return, you get a small amount of interest. Check rates online as they vary greatly among banks.
How Much Cash Should My Business Have on Hand?
The U.S. Chamber of Commerce recommends that a business keep three to six months worth of operating expenses on hand.
As in the case of your personal finances, this means "liquid" money that can be accessed as needed.
How Much Cash Should I Take When Traveling?
Unless you're going to a truly remote part of the world, your usual cash habits will work where you're going. Your ATM card should work at any major bank's ATM, and you can get cash in the local currency. Your major credit cards should work for purchases as usual. (You will pay a foreign currency fee for every transaction. The amount can be found in the fine print on their websites.)
You will find that cash is preferred to plastic in many places outside the U.S., particularly outside the big cities.
The Bottom Line
Federal Reserve data from the Report on the Economic Well-Being of U.S. Households for 2022 revealed that 32% of Americans would be able to come up with $500 or less to pay for an unexpected expense.
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.
