When you think of your bank, you probably think of the one you hold your chequing account with. You might use a variety of banks for different purposes like credit cards and savings accounts, but for most Canadians chequing accounts are at the centre of our banking world.
Your chequing account is the home base for your money. It’s the first stop for deposits and the main line of defense against monthly expenses. The health of your chequing account is a litmus test for the health of your overall finances. Keep too little money in your chequing account, and you risk getting hit with penalties and possibly hurting your credit if your account is overdrawn. Keep too much, and you might miss opportunities to grow your savings.
So, how much money should you keep in your chequing account?
To answer this question, you need to understand where you get value for having a chequing account. Typically, your banking package includes a number of transactions you can use to carry out your daily banking. Deposits come in, and debits—such as point-of-sale (POS) purchases, bill payments, and fees—go out. The point of the account is flexibility to move your money around quickly and easily, and in exchange for this, you usually pay a monthly fee and often forego any interest earnings on the account. This is in contrast to high-interest savings accounts, which usually have no monthly fee and pay competitive interest rates.
Let’s start with the obvious: You need to keep enough money in your chequing account to cover your day-to-day expenses. If you’re not sure what your daily needs are, the easiest way to do this is to look back over your monthly statements and see what debits you typically have in a month. For example, if your monthly spending is $1,500 on your mortgage, $1,000 on bills, and $500 for POS purchases, you may need to have as much as $3,000 in your account at the start of the month to cover your expenses. Since it’s probably not realistic for you to be a full month ahead of your spending, you might find it beneficial to keep track of all your bill payments in a calendar so you know when they’re coming up, or use an app to track your upcoming payments. Banks don’t always move as fast as we’d like them to, so try to have the money in your account at least a few days early just in case.
In addition to this amount, you’ll want to keep a few extra dollars for unexpected expenses. If something pops up that you’re not ready for (hello, annual magazine subscription fee you completely forgot about), you could be dinged with expensive non-sufficient funds (NSF) or overdraft fees—sometimes up to $50 every time your account is overdrawn. Choose a realistic amount to keep in your chequing account as a buffer. Your buffer should be just enough to keep you from worrying whether you have enough in your account. Start with a few hundred dollars and adjust up or down depending on your needs.
This is the minimum amount you should keep in the bank, but there are times when you’ll want to keep more. That’s because many banks will waive the monthly fee for their premium chequing accounts if you keep a minimum balance. For example, if you open a CIBC chequing account, you could have the monthly fee waived by keeping a certain amount of money in the account at all times. It varies by product, but the CIBC Smart Account has a monthly fee of $4.95 that’s waived as long as you never end a day with a balance below $3,000.
These minimum balance offers are tempting, but take a moment to consider whether that money would be better saved elsewhere. Using the example above, your $3,000 would earn nearly $70 in interest if saved in an EQ Bank Savings Plus Account at an interest rate of 2.3%. You can also look for a no-fee chequing account that doesn’t require you to keep a minimum balance.
There are other risks involved with keeping too high a balance in your chequing account as well. Because your chequing account information is shared in a lot of places, it’s a potential target for fraud or theft. The banks are pretty good at detecting fraudulent transactions, but keeping your balance in line with your expenses can help keep you from losing more money in case your account information falls into the wrong hands.
There’s one more thing for you to think about. If you use your chequing account for daily spending, keeping a higher balance can make you feel entitled to spend more than you want to, and hurt your savings goals. Moving extra money to a high-interest savings account (where it’s harder to reach) can help keep your spending in check.
Your chequing account may be the centre of your banking universe, but it shouldn’t be the place you keep most of your money. Even with monthly fee rebates, you can often earn more interest by moving extra cash into a high-interest savings account. The right amount of money to keep in your chequing account is just enough to cover your expenses, with enough of a cushion to keep you comfortably safe from surprises and penalties.