How much money should you keep in your checking account and how much should you transfer to savings?
There is no single amount that suits everyone, but there are factors that will help you find a balance between liquidity, security, and yield.
Most people tend to leave much more money than necessary in their checking account for daily needs and emergency situations. This is despite the fact that the balance can be used for deposits that will generate additional income. Although the yield on deposits, especially short-term ones, is not high, it is still better than zero profit.
Of course, there is no single amount that suits everyone. The checking account is intended for current expenses and a short-term safety margin, not to serve as a permanent warehouse for money. A family that spends 20,000 shekels a month can, for example, keep 25,000–30,000 shekels in the checking account, while the rest of the funds are transferred to savings. You can place these in an emergency fund in a relatively liquid deposit or savings account.
The problem with holding large amounts in a checking account is the loss of yield and erosion due to inflation. If 100,000 shekels can yield about 3% per year in a relatively conservative instrument, leaving them in the checking account without yield is equivalent to a loss of 3,000 shekels. On the other hand, transferring all money to a closed deposit or the capital market may create a liquidity problem, given market risks. The correct comparison is against conservative investments, as they are the alternative with a similar risk level, where the loss of yield is about 3%.
How to allocate funds?
A simple distribution can include three layers:
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Money for the coming month.
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An emergency fund of several months of expenses.
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Savings for the medium and long term.
Anyone who holds 150,000 shekels in a checking account while spending 15,000 shekels a month is likely holding too much cash. Anyone who holds 5,000 shekels against monthly expenses of 20,000 is on the other side of the risk. It seems reasonable to leave an amount in the checking account that covers the coming month, an amount for 4 months in an emergency fund, and the rest in investments.
Even if you decide to invest in conservative instruments, keep in mind the tax differences:
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MAKAM (one-year) is traded at a yield of 3.22% to 3.31% and is taxed at 15% on nominal profit.
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Money market funds are taxed at 25% on real profit only (after deducting inflation). Management fees range from 0.06% to 0.19%, and the money is liquid within one trading day.
A money market fund is expected to yield about 3.2% per year before tax. A deposit depends on your ability to negotiate with the bank, and the tax there is 15% on nominal profit. Do the math, and you will find that a money market fund, beyond being liquid, usually yields more. Any balance remaining in a checking account is money lost.
