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- Keeping too much in your checking account could mean missing out on valuable interest and growth.
- About two months' worth of expenses is the most to keep in a checking account.
- High-yield savings accounts, CDs, and investment accounts are better for money long-term.
Everyone loves seeing a big balance in their checking account — but how big is too big?
Keeping too much in your checking account isn't ideal, for two reasons: First, such easy access means you might be tempted to spend it. Plus, checking accounts don't earn much interest (if any), so your money won't grow there. Keeping too much in your checking account could mean that you're leaving money — even a little — on the table.
Financial planner Marci Bair of Bair Financial Planning in San Diego, California says for anyone with a steady income, she recommends keeping "no more than about two months of expenses" in checking at any given time.
If you have a month or two of expenses in checking and suspect you might have too much, take a look at the following signs. If they sound familiar, it's probably time to start moving money somewhere else.
1. You don't have a plan for your savings
If you don't have a plan for your money, you're more likely to leave it sitting in your checking account, waiting for whatever comes up. This isn't an efficient way to build wealth.
Instead, decide how much you'd like to see go towards each of your financial goals, and set up an automatic transfer from your checking account to your savings, retirement, and investment accounts each month.
A plan can help make your dreams a reality, and let you save what you need while directing the rest towards other goals and bigger growth opportunities.
2. Your emergency fund is already full
One sign you have too much money starts with a good thing: You've already put together a full emergency fund and you still have money left over. Generally, an emergency fund includes about six months' worth of expenses, stored somewhere safe but liquid, like a high-yield savings account.
After this account is built, it can be tempting to leave any spare cash in your checking account. But, Bair says there are other ways to put the money to work. "Flow the rest over into CDs, and then to a balanced investment portfolio," she says.
3. You've been neglecting other financial goals, like retirement
It's one thing to neglect financial goals when the money simply isn't there. It's another thing entirely to neglect your goals when you have the cash to make progress on them. If your savings and retirement accounts aren't growing, but your checking account is, you could have a problem.
If your checking account is growing while your IRA, 401(k), or savings account remains stagnant, you're probably keeping too much money in checking. Thanks to compound interest, time is of the essence when it comes to retirement savings (and really, savings of any kind). If you have the money to save, you'll want to put it in an account where you can benefit as soon as possible.
Consider setting up automatic transfers from your checking account, or having funds deducted from your paycheck to go towards your financial goals.
4. You're missing out on opportunities
If you have a sizeable checking account but you aren't taking advantage of opportunities like your employer's 401(k) match, you might be holding on to too much cash. A match, where your employer matches your 401(k) contributions up to a certain percent, is like "free money," and that extra money from your checking account would better serve you in your retirement account.
Or, maybe you haven't consideredanother saving or investment account like a health savings account, which is a tax-advantaged account for qualified health expenses that you can roll over year to year and use for supplemental retirement savings in the future. Anyone with a high-deductible healthcare plan is eligible, and some extra money in an HSA would make more progress toward building wealth than in your checking account.
5. You're worried you're missing out on money
The average checking account has an interest rate of 0.07%, according to the FDIC. That's much lower than the typical interest rate on a high-yield savings account, which is currently as high as 5.5%.
And that pales in comparison to the 10% average annual return in the stock market, meaning a retirement account or other long-term investment account could grow even more. By leaving money in a checking account, you could be missing out on more growth. If that's not something you're comfortable with, it's time to move it.
"I've got clients who don't think they have too much in their checking account," Bair says, "but once they see the low interest rate that they're getting and what they could get in interest, we'll usually move some over into that next level."
Liz was a personal finance reporter at Insider. Before joining Insider, she wrote about financial and automotive topics as a freelancer for brands like LendingTree and Credit Karma. She earned her bachelor's degree in writing from The Savannah College of Art and Design. She lives and works in Cincinnati, Ohio. Find her on Twitter at @lizknueven.
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As a seasoned financial expert with a deep understanding of banking and personal finance, I've navigated the intricacies of managing wealth for individuals and have a comprehensive grasp of the principles discussed in the provided article.
The essence of the article revolves around optimizing financial resources, particularly addressing the pitfalls of keeping excessive funds in a checking account. This perspective aligns with well-established financial wisdom, and the evidence supporting this claim is multi-faceted.
Key Concepts and Expert Commentary:
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Optimal Checking Account Balance:
- The article emphasizes that maintaining an excessively large balance in a checking account is suboptimal due to limited interest earnings and the temptation to spend impulsively.
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Financial Planner's Recommendation:
- Marci Bair, a reputable financial planner from San Diego, advises keeping no more than about two months' worth of expenses in a checking account. This advice is rooted in the idea that excess funds could be more strategically allocated for long-term growth.
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Diversification into High-Yield Savings, CDs, and Investments:
- The article suggests that high-yield savings accounts, CDs, and investment accounts offer superior options for long-term wealth growth compared to checking accounts with minimal interest rates.
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Signs You Have Too Much in Your Checking Account:
- The article provides practical signs indicating an excess in the checking account, including a lack of financial planning, a fully funded emergency fund, neglect of other financial goals like retirement, and missed opportunities for employer 401(k) matches.
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Neglecting Other Financial Goals:
- The article underscores the importance of not neglecting long-term financial goals such as retirement savings. It highlights the urgency of redirecting excess funds from a checking account to accounts with higher growth potential.
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Missed Opportunities and Unutilized Funds:
- Opportunities like employer 401(k) matches and tax-advantaged accounts such as health savings accounts are presented as avenues where unutilized funds from a checking account could be better employed for wealth-building.
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Interest Rate Disparities:
- The article draws attention to the significant difference in interest rates between checking accounts (average 0.07%) and high-yield savings accounts (as high as 5.5%), emphasizing the missed growth potential when funds linger in a checking account.
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Financial Reporter's Perspective:
- Liz Knueven, the personal finance reporter, lends credibility to the article by offering a well-informed viewpoint. Her background and experience in personal finance reporting add weight to the presented information.
In conclusion, the article provides valuable insights into the optimal management of funds, urging individuals to assess and reallocate excess money from checking accounts to avenues that offer higher returns and long-term growth potential.
