Why You Should Never Store All Your Money in Checking
A checking account is a necessity for most people, and when it comes to paying bills or depositing your paycheck, it certainly makes life a little easier.
While it can be a great tool for managing your finances, you have to make sure you’re using it wisely.
One thing people tend to do wrong with their checking accounts is treating like a savings account. Keeping a huge stash of cash in your account can give you a sense of security, but it can backfire if you’re not careful.
According to Moebs, the financial research service, the average checking account balance is around $5,500.
If you’ve built up a decent-sized cushion in your account, MyBankTracker has the rundown on why it is not a good idea and what you should be doing with your extra cash instead.
Easy to Overlook Fraudulent Charges
Identity theft has taken on a new dimension over the past couple of years as hackers increasingly target big retail in their attempts to steal consumers’ financial information.
Having your bank account hacked can be a financial nightmare, and when you’ve got thousands of dollars sitting in your checking account, it can take longer to detect.
One of the most common tactics identity thieves and scammers use to drain your bank account is to start by making a small purchase that’s not likely to trigger any red flags.
For example, if someone’s obtained your debit card or checking account number they might use that information to make a $5 or $10 purchase at a grocery store.
If you’ve got a $5,500 balance, you may not notice a $5 debit transaction right away.
Once the identity thieves realize that you’re not paying attention, they can go to town on your account, making purchases left and right and draining your balance in the process.
Unless you catch on to what the scammers are doing and report it to your bank immediately, you could be held liable for any funds they make off with.
You Could be Missing Out on a Bigger Return
Aside from making yourself a target for scammers, maintaining a high balance in your checking account won’t do you any favors in terms of earning interest.
You could try a high-yield checking account, but these are getting increasingly hard to find. Not only that, but you’re still at risk of having your account targeted by a hacker.
Parking your extra cash in a savings or investment vehicle offers you a shot at earning better returns. If you’re not sure where the best place to put your money is, we’ve broken down five checking account alternatives that are worth considering:
Online Savings Account
If you’re working on building up an emergency fund, an online savings account is a great place to put it.
Why choose an online bank and not a brick-and-mortar bank? For one thing, online banks tend to charge fewer fees, so you’re not having to eat into your savings to maintain your account.
Because they tend to have lower overhead costs, online banks are in a better position to offer more favorable interest rates on savings. While you don’t have the convenience of being able to walk into a branch, most online banks make it easy to manage your account online or using mobile apps.
Tip: If you need some help pinning down which online savings account is best, our savings account finder tool can point you in the right direction.
Certificate of Deposit
A certificate of deposit can offer higher yields than a regular savings account, but it’s better suited for someone who won’t need the cash for a set period of time.
With a CD, you’re saving the money for a specific term, which may be anywhere from three months up to 10 years. The money earns interest and once the CD matures, you can either cash it out or roll it over into a new CD.
Keep in mind that there’s usually a penalty for withdrawing money before the maturity date so you probably wouldn’t want to use this option for your emergency savings.
Money Market Account
Money market accounts are a sort of hybrid between a checking and savings account. These accounts tend to come with a higher interest rate, and you also have the ability to write checks.
The biggest difference between a money market and a regular checking account, however, is that under Regulation D, you’re limited to making six withdrawals a month.
So what would you use a money market account for? This kind of account can come in handy if you’re saving up for a large purchase and you want to earn a higher interest rate while still having convenient access to your money.
If you’re saving for a down payment on a home, for example, having a dedicated account for those funds with check-writing capabilities can make closing the deal a little easier once you’re ready to buy.
Saving for retirement is something that should be high on your list of financial priorities, and if you’re already socking away money into a 401(k) or another employer-sponsored plan, you’re ahead of the game.
Adding an Individual Retirement Account into the mix is an easy way to amp up your savings or kickstart your nest egg if you don’t have access to a retirement plan at work.
Opening an IRA isn’t that difficult, and the hardest part is usually deciding whether to go the traditional or Roth route.
With a traditional IRA, you may be able to deduct your contributions for the year, but you’ll pay taxes on your withdrawals in retirement. A Roth IRA, on the other hand, offers tax-free withdrawals but you don’t get the benefit of a tax deduction.
One thing to keep in mind about an IRA is that it’s not like a savings account. The money you’re putting in is invested in the market, so it’s not risk free. There are also going to be higher fees to contend with, which can take a bite out of your bottom line.
Sticking with something like a lower cost index fund vs. an actively managed mutual fund can reduce the amount you’re shelling out on fees.
If you’re stock market-savvy, moving some of your extra money out of your checking account and into a brokerage account can potentially lead to a big payback. With this type of account, it’s possible to trade stocks, mutual funds or options online.
Again, putting money into the market involves taking on a certain amount of risk, so this isn’t a strategy you should jump into if you’re not comfortable with the possibility of losing some of your money or waiting a bit longer to see a return.
Out of the five alternatives we’ve outlined, it’s also the one that tends to be the most expensive.
When you place an order to trade stocks or mutual fund shares, a broker has to complete the transaction on their end, and they charge a fee for this service.
Online brokerages are much cheaper than full-service brokers, but you’re still looking at paying anywhere from $5 to $10 per trade.
For someone who only makes trades a few times a month that may not be a big deal but if you’re interested in making multiple trades daily, you need to be mindful of how much you’re paying in fees.
How Much Money Should You Keep in Your Checking Account?
While we’ve shown you why it makes sense to keep most of your cash in a savings or investment account, you don’t want to make the mistake of shrinking your buffer too much.
If you’re running your checking account down to just a few dollars, you leave yourself open to the possibility of getting hit with an overdraft charge, which can get expensive very quickly.
So how much money should you be keeping in your checking account? The exact number is different for everyone but here are some steps that can help you to pinpoint a dollar amount that’s right for you:
Add up all of your expenses for one month, including fixed expenses like your housing payment, insurance, and utilities as well as variable spending, like groceries and gas.
Consider how often you’re paid. Do you have money coming in to cover those expenses on a weekly, biweekly or monthly basis? This is especially important if you’re self-employed and you don’t get a regular paycheck.
Ask yourself how much of a cushion you would need to feel comfortable based on your expenses and income.
Specifically, consider how much money you have in your account once the bills are paid but before your next paycheck comes in. Would you need $100, $500 or $1,000 not to feel jittery while you’re waiting for a payday?
Ideally, you should be aiming to have the equivalent of at least one month's expenses sitting in your checking account at any given time. That way, if you lose your job unexpectedly or you miss work because of illness, you can stay afloat in the short-term without having to dip into your emergency fund.
There's nothing dumb about keeping a limited pool of money in checking--enough for emergencies, but not so much you lose out on substantial investments and savings.