Can you have too much money in your checking account?
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Opening a checking account is one of the very first steps to take when starting your personal financial journey.
With a checking account, your paychecks can be directly deposited into your account, your money is safe, and your funds are easily accessible for all of your bill paying and spending needs.
But before you store all of your income in your very first bank account, there are several reasons why your checking account shouldn’t contain all your money.
âHave you ever heard your grandmother say, ‘Don’t keep all your eggs in one basket? Â»Â», Says Gordon Achtermann, a Virginia-based CFP at Your Best Way Financial Planning. “Well, that applies perfectly to a checking account.”
Your checking account is the best place to keep the money you often need, but that’s it.
âThe checking account is very good at what it does,â adds Achtermann. “But it is only designed to do a thing. It serves as a place to keep your cash that you need to pay this month’s bills, as well as your spending allowance on yourself. “
Scott Cole, an Alabama-based CFP at Cole Financial Planning and Wealth Managementsuggests considering a checking account only as “a conduit through which money flows in and out quickly”. For this reason, the money in your account doesn’t have to be too much more than you need to cover your planned expenses.
A budget can provide a snapshot of your recurring cash flow. By noting your essential costs (think rent, mortgage, utilities, insurance, transportation, and food), as well as incidental expenses (vacation, travel, entertainment), you can see how many the money you have to allocate to your checking account – so how much you can withdraw to put elsewhere.
Cole also cautions that keeping too much money in your checking account tends to increase your spending, so much so that it ends up depleting all your income.
âWhen we keep too much control, it invites the temptation to spend too much on our current needs and wants and at the expense of our longer-term needs and wants,â says Cole.
Where to put this excess money from your checking account
A checking account is best used for storing the money you use every day, but for all other purposes there are better places for your money.
Here’s where to put your extra money instead of your checking account:
In a high yield savings account
For the money you want to save for future use or As a matter of urgency, put that money in a high yield savings account where it can earn a little more interest than it would in a checking account. Cole points out that there are opportunity costs to maintaining large control balances, beyond the temptation to spend. High yield savings ensure you don’t miss out on higher income.
“Maybe not as much as before with such low interest rates, but still, if a high yield savings account earns 0.5% [APY] and your check isn’t earning anything, well it’s something – and something is better than nothing, especially when it comes to money, âCole says.
The best high yield savings accounts
Top rated high yield savings accounts offer above average APY to all clients (regardless of your balance), are FDIC insured, have no monthly maintenance fees and minimum balance requirements weak (or non-existent).
We recommend Marcus by Goldman Sachs high yield online savings with no fees and easy mobile access. It’s the easiest savings account to use when all you want to do is grow your money with no strings attached.
If you’ve already racked up a few thousand dollars in emergency savings, consider putting half of that savings on CDs, suggests Achtermann. With a CD, you have the opportunity to earn a higher interest rate in exchange for keeping your money tied up for a certain period of time, with terms ranging from three months to five years. On the maturity date of your CD or at the end of your term, you get your money back, in addition to the interest accrued over time.
The best CDs
Top rated CDs offer APYs above the national average, are FDIC insured, have no monthly maintenance fees (which is typical), and low minimum deposits requiring $ 1,000 or less to open an account.
If you can keep your money intact for five years, we recommend the Ally Bank Five-Year High Yield CD as it compounds interest daily and there is no minimum deposit to open an account. Ally also has a variety of CD options, including a Raise Your Rate CD, No Penalty CD, and Select CD, if you’re looking for something other than a five-year account.
On the market
Once you have a stable amount of savings and have no high interest debt (like credit card debt), invest the rest of your excess cash in your checking account.
Achtermann suggests that novice investors look to Avant-garde, in particular the Vanguard Total Stock Market Index Fund (VTI). This fund tracks the entire US market, including large, mid and small cap stocks. It is passively managed and the expense ratios are very low at 0.03%. âFor someone in their twenties or just starting to invest, this is the only fund to start with,â he adds.
An IRA or Roth IRA are also good options for those looking to invest for their retirement and want to take advantage of the many tax benefits that accounts have to offer.
While the exact amount of money consumers should keep in their checks really depends on each individual’s money coming in and going out, Cole provides a general guideline.
For those who are more disciplined about their discretionary spending and aren’t inclined to overdraw their account, just keep the exact amount needed to cover the current month’s expenses. Unless your bank requires a minimum balance, you don’t have to worry about certain thresholds.
On the other hand, if you are prone to overdraft fees, add a little cushion for yourself. Even with a cushion, Cole recommends keeping no more than two months of living expenses in your checking account.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.