We have a Bank of America checking account and the balance is usually around $3K to $4K, all others go to EmigrantDirect or HSBC. Our paychecks are directly deposited twice a month into the BoA account. As of bills we need to pay, I arranged the payment due dates of credit cards we used most and mortgage be within the first 10 days of the month, after the first deposit is made at the beginning of the month. Since we charge almost everything on credit cards, I know when the bills come and the approxmiate amount. After the second deposit, usually at the middle of the month, I check the balance of the BoA account and transfer whatever amount above $4K to savings accounts. In addition, several hundred dollars are transferred automatically from BoA to EmigrantDirect on the pay day.

It’s good and necessary to have some money in the checking account that you can withdraw immediately in case of any emergency. But I think it is very unlikely that I will need several thousands of cash right away. Therefore, leaving too much in a checking account that earns almost nothing is not a very good choice, in my opinion.

BTW, I’m not advocating E*trade, I’m advocating using a single vendor, regardless of the company.

We use E*trade for everything. Joint checking, saving, brokerage, and money market accounts. There are no other his or her accounts. A single log-in shows everything under a single pane of glass and having totally combined assets allows us to take advantage of great savings rates (not quite as good as Emigrant, but close).

We have allocated a specific amount to be direct deposited into our checking account every pay period that exactly matches our fixed spending (e.g. mortgage, electric, gas) and projected variable spending (e.g. groceries). We also target a minimum balance of $2,000 in case a payment “accident” happens where we forget to transfer money from our savings for a large purchase, like the new washing machine we just bought (we travel a lot for work, sometimes weeks at a time, so this tends to happen more often than I would like).

Similar to ChrisCPA, we also track our projected spending in Excel for 12 months in advance. Essentially it is a cash flow statement. Pick up a basic accounting book to learn how to build one. The equation is simple. For a monthly cash flow statement it looks like this:

Beginning balance
+ All income
- All expenses
= Ending balance
- Desired minimum balance
= Free cash
- Projected expenses next month before receiving a paycheck
= Available cash

Essentially, the target is to have “Available cash” always equal zero. If it is negative, we are either spending too much, need to transfer money from savings, or pay ourselves some more every month. If it is positive, we need to be directing more of our paychecks into savings and investment.

Sorry for the wordy response. I used to take a more “gut-feel” approach to these things, but with my wife’s prodding we now take a much more exact approach that eliminates guesswork. I thought the approach would save us a few pennies, but in fact it has saved us hundreds if not thousands every year. I could go into more detail, but I’ll save everyone the pain and agony of my already pedantic monologue

We chose the minimum-balance target as the cushion we would like to have to cover fluctuations and minor unexpected expenses. Our paycheck direct-deposits allow multiple destinations, so we direct-deposit enough of our paychecks to cover our normal expenses. The rest of the money goes to investments or a higher-interest cash account.

The minimum balance occurs on about the same day every month, so we can look at the account balance at about that time every month and know how we’re doing in terms of expenses. If it’s low, we can plan to cut back a bit the next month or transfer some money in to make up the difference. If it’s high, we can transfer the excess out.

If your expense estimate of $3000-$4000 is accurate and you’re depositing roughly enough to cover those expenses, then every month you’ll see a minimum balance of at least $3000 (probably higher depending on when you get paid and when your bills go out). Is that the size of cushion that you want or would you be comfortable with less?

Assuming the difference in rates between your low-interest and high-interest accounts is 4%, then every $1000 in cushion has an opportunity cost of $40/year. Not exactly a boondoggle, but it’s something.

The mechanics of this approach are essentially identical to what samerwriter described in his post above. I just wanted to point out that with this approach it’s easy to set and track a meaningful target and it’s easy to quantify the trade-off you’re making, all while maximizing your return on your cash.

For example Vanguard always offers high rates on it’s prime money market account, and you have check-writing ability. Better yet, when your “emergency savings” gets too high it’s easy to transfer money into some of the best index funds around (Vanguard’s). I imagine most other firms (Fidelity, ML, etc..) offer similar services.

When we have to make large purchases that aren’t covered by our checking account, we just write a check from our Vanguard account.

Look around your local market some more. Unless you live in the middle of nowhere, I bet you can find something better . . .

1. Make your budget.
2. Figure out how much you need per month. (add up the entries in your budget)
3. Direct deposit your paychecks to Emigrant Direct
4. Set up a monthly automatic transfer from Emigrant Direct to your checking account for the amount you calculated in #2.

If you really want, put a $1000 or so cushion in your checking account. This technique has several advantages:

1. Your paychecks start earning interest immediately
2. Any “extra money” in your paychecks (raises, bonuses, etc..) is hidden from you (since it goes straight into your savings, it never touches your checking).
3. You can set up your transfers however you want. Prefer to get “paid” weekly? Transfer 1/4 of the monthly budget amount every week.
4. You can give yourself a “pay raise” or “pay cut” whenever needed. Just change the amount you’re transferring.

I was looking at their site over the weekend for a coming refinance I will be doing in February. They have a ePremium checking that offers 3% if you have an average daily balance of $5K or a minimum balance of $2500 throughout the month. They also offer a Money Market Savings Account at 5.15%. You could just have the interest from the checking transfered to savings and be a happy camper.

I am considering this, as I am using HSBC for checking and savings, and I have no local HSBC branches, so it would not be much different for me. I also keep a checking account at a local bank, just in case I have some checks I need to cash quickly.

ChrisCPA – the money market account with check-writing is a good idea, and something I should look into. I’m all about less wasteful surplus in the checking account.

We keep bare minimum in our brick-and-mortar checking account..just enough for rent and bills and some for emergency withdrawal. Everything else goes to high interest accounts.
Btw, may be I am curious, you say “joint checking and savings account that pays paltry interest” and “her (or my) Emigrant account”.
Why wouldn’t you have joint high-interest accounts together; any specific reason or it simply turned out like that.