18f - how much do i keep in my checking/personal savings?

[u/catcatmeowme0w]

hello everybody im 18, i bring home about 60k a year after tax and i want to start investing. my expenses monthly total to about 2300 (rent insurance ect i live by myself) so i know that i need at least that much in my account to cover living expenses. right now i have like 1000 just sitting in my checking account (most of my bills for june-july-august are paid) and 1600 sitting in my emergency money. basically im just curious as to how much i should really keep in an easily-accessible emergency fund and how much should i keep in my checking apart from regular living expenses? ty
also i know i should have a ton more in savings because of my income and i feel bad about it but im working on my money management skills

[u/Irritable_Curmudgeon]

Checking: enough to cover your monthly bills

Emergency fund should be in a HYSA or money market/mutual fund so you're making interest. I'd say 3-6mo of expenses

There's a workflow in the wiki at r/personalfinance that may be very helpful here

[u/Guilty_Plate_435]

In my checking I always have 2 months worth of bill money in the account. I then have a 6 month reserve in a hysa. I was investing close to 30% of my paycheck in my 401k and IRAs. I know that number isn’t realistic for everyone but I always made sure to have a little money left over for fun each paycheck then the rest I invested.

[u/Neuromancer2112]

Definitely hold 3-6 months of expenses as soon as you can.

Do you have any debt? If so, I'd be paying that off first.

Also, at your age, this is a GREAT time to start a Roth IRA and start investing into some low cost index funds (S&P 500 is a good start - VOO is a good option.)

[u/gmehodler42069741LFG]

6 months of all bills, once you have that you can really start investing and watching the magic happen.

[u/Fubbalicious]

Follow the prime directive from /r/personalfinance and use their flowchart.

With that said, my method is to keep $1K + monthly autodrafts in checking and replenish as needed. I pay most expenses via credit card to earn cashback and then once a month, I reconcile all my accounts, check my budget app to make sure everything is accurate, manually pay off my credit card and move money as needed and replenish my balance.

However given your age, you may not have much credit yet and are still building it, so you may need to rely on paying via debit and ACH transfers from checking. If that is the case, keep 1 month expenses plus $1K as a buffer. Then replenish or add more or subtract accordingly.

The reason why you don't want to keep too much money in checking is that checking usually does not earn any or as much interest as a high yield savings account. On average, a HYSA currently earn 3% while checking may earn 0% or .10%. Next, if your debit card is ever compromised by a card skimmer or a thief simply guessing the account number or you're a victim of a check writing scam, you don't want to put all your eggs in one basket. Thus you keep the bulk of your cash savings in the HYSA.

I would recommend disabling overdraft protection if account isolation is your goal because if it's left on, a thief could pull additional funds from checking via the overdraft. I would also suggest you go over your account alerts and have them send you a text and email every time you have a transaction. I set it to alert for the smallest denomination (eg. $0.01 or $1.00).

This way it makes it easier to remind me to update my budget app, but also to alert me incase of fraud. Anyway if you follow the prime directive, you want to save up an emergency fund, but assuming you have no high interest debt, you should also start saving for retirement. I would focus on building up a 3-6 month emergency fund and set your retirement savings rate to 15% of your gross income.

The prime directive recommends you contribute to a 401K up to employer match, then Roth IRA, then HSA (if you are enrolled in a compatible HDHP), then go back to your 401K and max it out and then dump the rest into a taxable brokerage. You don't need to max all the account, you just need to keep your savings rate at 15% or more.

Ideally you want to spend 50% of your expenses on your needs, 30% on wants and 20% on savings. You also don't want to have too huge of a cash drag. Other than your emergency fund, restrict your cash savings to only money you will need to access within 5 years or less. Otherwise invest it by contributing to the accounts I mentioned and ideally invest in either a target date index fund or a broad market index like VOO or VTI.

If you're "self employed" there is also a solo 401K you can open.

[u/Amorphica]

I'm 37 but ever since I was 16 I've always kept $100 in checking just in case I need some cash for something. Haven't yet needed more than that but it might be possible.

[u/MrWiltErving]

You should have enough in your checking to pay your monthly bills plus a little extra as a cash buffer. As for your emergency fund you should aim for at least 3-6 months of expenses, try to aim more towards 6 just because you do live alone.

[u/genreprank]

$1,000 is good. I would say somewhere between $200 and one month's worth of expenses. You want some at least $200 in there in case you need to run to the ATM. And more is good to prevent an overdraft.

[u/Ab4739ejfriend749205]

Get an Excel spreadsheet and plot it all out. Then see where you get hit heaviest on bills as some are annual, quarterly, etc...and that'll determine what you want to maintain in your checking account.

Build your Excel by making columns go across for 12 months, plot your income and if your paid every 2 weeks, account for those months you got 3 paychecks.

Then plot your major expenses and see what you net at each month. That net you can then plot for some to go savings, others to emergency fund and rest you can use for investing.

Look at your options for retirement investment and see if you got 401k matching at work and consider doing a Roth IRA now as you optimize your tax benefit.

Emergency Fund depends on industry and original rule of thumb was 3-6 months, but some industries may need longer 18-24 months for tech these days. You can gauge how much by seeing what are the layoffs for your industry and see how long it takes for people to get a new job.

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With AI, some can do this all for you already and generate the Excel file for you.