How to Decide How Much Money to Keep In Your Bank Accounts

Striking a balance between being cash secure and overly anxious about money

We talk what amounts to a lot of trash in personal finance.

Most content repeats the same money-related wisdom over and over again. A majority of articles that promise to tell you “how to” do something, don’t. They’re general, vague, or imprecise. I’m as guilty as the next scribe, so lately I’ve been trying to drill it down.

We do life on the ground.

No two people roll exactly the same way. There’s no magic formula for how to construct an emergency fund or determine how much cash you should keep on hand.

This said, we can be more specific. With specificity, there’s a better chance you’ll have something to take away from my thought trajectories and our shared, yet distinct experiences.

If you hang till the end of this article, you will be able to plug in your own numbers and decide exactly how much money you should keep in your bank accounts.

Yes, you probably should have multiple bank accounts

The universal recommendation that you should have an emergency fund makes it obvious. You should have at least two bank accounts — a checking account to pay your bills and a savings account to keep your emergency fund.

To achieve true financial flexibility, you’ll need more than two:

One pot of money to consistently satisfy your monthly living expenses for 1.5 to 2 months (subsistence fund). One pot of money to cover reduced or a total loss of income for 3 to 6 months (emergency fund). Other pots of money to pay for discretionary needs and wants (a new apartment or continuing education fund). And another pot of money to fund the aforementioned starts, stops, and restarts (transition fund).

The way you label pots of money after your subsistence and emergency funds changes with where you are in life and personal preference. At the moment, I’m stocking new apartment and temporary retirement funds in addition to maintaining my subsistence and emergency funds.

It’s the only way to juggle multiple money needs at once. If you’re pulling from one big pile, you’re more likely to get off track.

Hopefully, you’ll never have to touch your emergency fund

This bears repeating in every article on the matter. You’ll go broke if you make liberal use of your emergency fund.

It exists for the true emergency of periods of reduced income. So you make $4,000 a month. Your expenses are $3,000 a month. You lose your job. After you have depleted your subsistence fund, you start tapping the emergency fund to the tune of $3,000 a month (as you strive to lower that number) until you replace your income.

Some people fear inflation and preach against having too much cash on hand. But when you think about losing all or some of your income, Mark Cuban’s 12-month emergency fund advice sure feels great, like the comfort of a big hug or the calm of a little kiss. I endorse Cuban’s thinking without hesitation.

What to do when something comes up

Your brother wants to borrow $400. Not an emergency. If you’re in the position to loan your sibling $400, you’ll be able to Venmo him the cash from your subsistence fund and not miss a beat.

You have a $1,000 car repair. This is where it gets tricky. Hopefully, you’re able to pay that expense out of your subsistence fund and adjust your income allocation for a month or two to replace the $1,000 you took.

For example, if you have $1,000 left over each month and you distribute it to your new apartment and temporary retirement funds, maybe you halt those transfers for a month to replenish your subsistence fund. Bottom line — set the new apartment and temporary retirement plans on hold before you deplete your emergency fund.

Many of us keep considerable amounts of cash on hand to feel secure. You defeat the entire purpose if you’re constantly hitting up the one fund earmarked for our biggest insecurity — losing our income.

You absolutely need the emergency fund. You don’t absolutely need a new apartment or the luxury of quitting work for six months. So if you fall back on any money when something comes up, fall back on the funds that follow the emergency fund.

You might require a fund in between an emergency fund and your other funds. This would be a true rainy day fund. It exists for “emergencies” other than a loss of income. Things like needy brothers, flat tires, and busted espresso machines.

How it can look on the ground

Monthly income: $4,000

Monthly expenses: $3,000

Thought #1: Can you reduce that $3,000 for an insanely low cost of living?

Subsistence fund target balance: $5,000-$6,000 (rolling)

Emergency fund target balance: $36,000 (for 12 months)

Thought #2: Rolling balances. You do the dance. Sort of like navigating a four-way stop sign. Money goes out, money comes in. Balance goes down, naturally springs back up. You can react quickly with a rolling cushion.

Rainy day fund balance: $2,000

Thought #3: I don’t have a rainy day fund. It’s part risk and part I’m nimble enough in my subsistence fund (knock on wood) to react to a rainy day. However, the more I think about it, the more I think it makes sense to have a rainy day fund for the express purpose of staying out of your emergency fund.

New apartment fund balance: $5,000

Thought #4: This is a somewhat arbitrary number. More importantly, it’s about estimating the actual cost of whatever you have an additional fund for. Moving to a new apartment might look like this:

• $2,000 security deposit
• $2,000 first month’s rent
• $1,000 movers and a new chair (or something)
• Then, you get your security deposit back from your old apartment and allocate it accordingly.

Temporary retirement fund balance: $20,000

Thought #5: At this point, you have crushed the snot out of being financially flexible. That might look like this.

The beauty of the ultimate fund for cash security is that it not only affords the luxury of quitting work for a period, it allows you to do so without having to empty your subsistence (or emergency) funds. And, if all hell breaks loose, you don’t really need to temporarily retire, so you can use this money during truly desperate times.

I hope this exercise helps you visualize the idea of keeping X amount of cash on hand. For something seemingly so practical, it can feel theoretical, if not outright abstract.

It’s easy to say, “have an emergency fund!” It’s much more difficult to anticipate how that money acts, on the ground, in relation to your overall financial picture — anticipated and unexpected.

I take my various funds, add them up, and ask myself, if something between a blip and all hell breaks loose happens, how will I feel? How will I react? Will I make a stupid money decision, such as selling stock, due to panic and anxiety?

When the number works out — practically and emotionally — I’m confident I can take every dollar I have left and put it towards the true vehicle for building wealth — investing in dividend-paying stocks.

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.