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 building up an emergency account.

Part 2: What to do with your checking account

The main cog of your entire financial machine will be your primary checking account.  You know the one I’m talking about.  This is the account where your paycheck gets deposited every month (you do have direct deposit, don’t you?).  This is the account that you use to pay for that new iPod.  This is the account you use to pay your rent.  And if everything’s going smoothly, this is the account that will have just the right amount of money in it to cover your expenses without letting your money sit by without working for you.

Knowing how much money to keep in your account is akin to balancing a scale just right.  Most checking accounts don’t have a great rate of return on them, so you don’t want to keep too much money in them, but you do want to have enough in your main account to ensure you can cover your expenses, and then some.

Many people that have a lot of disposable income actually don’t keep enough in their accounts, while others may keep too much in them.  To get this balancing act just right, you need to take a look at your average monthly expenses.  By knowing approximately how much you’re spending each month, you can come up with the appropriate amount to place in your account without having to guess on how much you’ll need.

On the 1^st of each month, you should set aside enough of your paycheck to bring the balance in your account up to 2-3 times your average monthly expenses.  By doing this, you ensure that you’ll be able to cover all of your expected costs for the month, and you’ll be able to quickly pay for a variety of unexpected expenses that inevitably creep up.  Having that extra balance means avoiding the need to transfer money from another, higher yield, account, just to account 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 just bring it back up to the amount you determined you need and start the cycle again.

A few final tips on how to deal with your checking account:

1. Fees – You really shouldn’t have a checking account that’s charging you any sort of fees.  There are so many different options out there that it’s very easy to find an institution that won’t charge you to merely maintain an account with them.
2. Linked accounts – I have a checking account with the same institution that issues my main credit card.  This lets me easily transfer funds from my checking account to my card with very little hassle.  The bank even gives me an option to automatically pay off my credit card balance using my checking account, every month.  If you have the option to link one or more of your accounts, particularly a credit card account, I’d recommend doing so.  Just be careful of all of the automatic withdrawal and transfer options, like I mentioned earlier, you don’t want to be left with too little money in your account.
3. Automatic transfers – As I mentioned in Part 1 of this series, I am a big proponent of “paying yourself first” – essentially, allocating money to your own accounts before paying others.  As I go through this series, I’ll be detailing a variety of different types of accounts you should be maintaining, and it’s easy to set up automatic periodic transfers from your checking account to your other accounts.  In fact, you could probably do this with your actual paycheck as well.  I actually recommend not setting up automatic transfers.  There may be times when you don’t want to transfer money out of your checking account, and if you set up automatic transfers, you’ll have to go through the hassle of re-transferring that money.  In general, I prefer to make my own transfers each month (with the exception of my 401(k) account, which I’ll discuss later).  I realize this is a personal preference, though, so do what makes you the most comfortable.

So, now you know what to do with your checking account.  In the next few articles of this series, I’ll discuss how to participate in longer-term investments, starting with your 401(k) in Part 3.  Stay tuned!