Many of us tend to keep more money in our checking account than we should, experts say. A checking account is often where we deposit our paychecks or other recurring income. Plus, many checking accounts, including Tower’s, are free and great for everyday spending, automatic payments and ATM cash withdrawals. The funds are easily available for bill-paying and spending needs, and an easy way to manage our cash flow.
However, if you’re keeping too much money in a checking account, your money may not be working for you. For instance, you may be missing out on compounded interest or dividends.
Here are a few reasons why your checking account shouldn’t hold all of your money:
- You’re prone to overspend. Because the money is so easily accessible, keeping too much of it in a checking account often leads to excess spending or spending on things you don’t need—to the detriment of long-term savings.
- You’re missing out on valuable growth. Money in your checking account isn’t just tempting to spend—it’s not growing. Checking accounts don’t earn much interest or dividends (if any), so your money won’t grow there. Keeping too much in your checking account could mean that you’re leaving interest income on the table.
- Your retirement fund isn’t growing. It’s one thing to neglect financial goals when you don’t have the money; it’s another thing to neglect your savings goals when you have the money on hand.
If your checking account is growing, but your savings and retirement accounts are not, you may have more in checking than you need. With compound dividends, time is of the essence when it comes to savings, and the earlier you start saving the better.
If you haven’t started a retirement savings plan yet, a Traditional or Roth IRA are good options to invest for retirement and take advantage of the many tax benefits these accounts offer.
- You lack a savings plan. If you have a large amount of money in your checking account, it’s likely that you don’t have a financial plan or strategy. Letting money sit in checking waiting for whatever may come up isn’t an efficient way to build wealth.
A better approach may be to decide how much you’d like to see go towards your financial goals, and set up an automatic transfer from your checking account to a savings, retirement or investment account each month.
- You’re passing up other potential income. Be sure you aren’t missing out on other potential income, like an employer 401(k) match. A match, where your employer matches your retirement contributions up to a certain percent, is like “free money” that you should take advantage of.
How much should you keep in a checking account?
If you have a steady income, it’s recommended that you keep about two months’ worth of expenses in your checking account. Expenses can include monthly payments for things like utilities, mortgage/rent, cable and groceries.
Give yourself a little cushion, as some bills increase from time to time. And, if your account has a minimum balance requirement, be sure to factor that so you don’t drop below it and incur fees. By the way, Tower free checking does not have a minimum balance requirement—another great reason to bank with us!
Resources: CNBC, Business Insider, Intuit Mint Life, Tower Wealth Management