This is the second post in a multi-part series on how to manage your finances so you can build up your savings, have a safety net, and still live comfortably today without having to live paycheck to paycheck. Click here for part 1, which discusses the hows and whys of building up an emergency fund.

Image from muresan113

Keep the right amount of money in your checking account

Your checking account is the main financial engine of your life. You use it to hold short-term cash – the cash that you’ll need to pay for that new phone, next month’s rent, and that trip to Europe. So it’s important to keep it well-funded, but you can’t afford to put all your money into your checking account. After all, you want to use some of that in your options account to start generating income, don’t you?

Knowing how much to keep in your checking account is just like balancing a scale. Most checking accounts don’t pay you a lot of interest, so you don’t want to keep too much money in them, but you do want to have enough to make sure you can cover any expenses that come up.

To get this balancing act just right, you need to take a look in your financial mirror. The first step is to figure out how much you’re spending each month. Once you know this, you’ll know how much to keep in your checking account.

So how much is just enough?

Image from Salvatore Vuono

On the 1^st of each month, take your average monthly expenses, multiply it by 2, and then subtract what’s currently in your checking account from this number. That’s how much you need to add to your checking account.

By doing this, you’ll be able to cover all of your expected costs for the month, and you’ll have enough to quickly pay for any small or medium unexpected expenses that inevitably creep up. Having that extra balance means avoiding the need to transfer money from another account, particularly your emergency fund, just to pay for a short-term expense. Over the course of the month, your balance will slowly drift downward, but when your next paycheck comes in, you can just bring it “refill” your checking account as you need, and start the cycle again.

A few final tips to keep in mind:

1. Fees – You really shouldn’t have a checking account that charges you money. There are so many different options out there that it’s very easy to find an institution that won’t charge you just to maintain an account with them.
2. Linked accounts – Keeping your checking account with the same bank that provides your main credit card will easily let you transfer fund from your checking account to your card with very little hassle. The bank may even give you the option to automatically pay off your balance every month by withdrawing from your checking account. If you have the option to link one or more of your accounts, particularly a credit card account, you may want to do it.
3. Multiple accounts – You may also want to keep multiple checking accounts for all of the different expenses you have. This is a good way of making sure you don’t tap into next month’s rent payment for the next gadget you want to buy.

That’s it for this part. In the next article, we’ll discuss how to get that nagging debt under control.