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Opening a checking account is one of the very first steps you take when starting your personal financial journey.
With a checking account, your paychecks can be directly deposited into your account, your cash is safe and your funds are easily accessible for all your bill-paying and spending needs.
But before you stockpile all your income into your first-ever bank account, there are a few reasons why your checking account shouldn’t hold all your money.
“Have you ever heard your grandmother say, ‘Don’t keep all your eggs in one basket?'” says Gordon Achtermann, a Virginia-based CFP at Your Best Path Financial Planning. “Well, that applies perfectly to a checking account.”
Here’s why you shouldn’t keep all your money in your checking account
Your checking account is the best place to keep the money you frequently need, but that’s it.
“The checking account is very good at what it does,” Achtermann adds. “But it is only designed to do one thing. It serves as a place to keep your money that you need to pay this month’s bills, plus your allowance for spending on yourself.”
Scott Cole, an Alabama-based CFP at Cole Financial Planning and Wealth Management, suggests thinking of a checking account solely as “a conduit through which money comes in and quickly goes out.” For this reason, the money in your account doesn’t need to be too much more than what you need to cover your planned expenditures.
A budget can provide a snapshot of your recurring cash flow. By writing out your essential costs (think rent, mortgage, utilities, insurance, transportation and food), plus noting your ancillary spending (vacations, travel, entertainment), you can see just how much money you should allocate to your checking account — and thus how much you can take out to put elsewhere.
Cole also warns that keeping too much money in your checking account tends to lead to your expenses expanding, so much so that they eventually eat up all of your income.
“When we keep too much in our checking, it invites the temptation to spend in excess for our present needs and wants and to the detriment of our longer term needs and wants,” Cole says.
Where to put that surplus of cash from your checking account
A checking account is best used as storage for the money you use every day, but for all other purposes, there are better places for your cash.
Here’s where to put your extra cash instead of your checking account:
In a high-yield savings account
For money you want to save for future use or emergencies, put that cash into a high-yield savings account where it can earn a bit more interest than it would sitting in a checking account. Cole points out that there are opportunity costs with keeping large checking balances, beyond just the temptation to spend. A high-yield savings makes sure that you aren’t missing out on higher earnings.
“Perhaps not as much as it used to be with interest rates so low, but still, if a high-yield savings account is earning 0.5% [APY] and your checking is earning nothing, well that is something — and something is better than nothing, particularly when it comes to cash,” Cole says.
The best high-yield savings accounts
Top-rated high-yield savings accounts offer an above-average APY to all customers (no matter your balance), are FDIC-insured, have zero monthly maintenance fees and low (or no) minimum balance requirements.
We recommend the Marcus by Goldman Sachs High Yield Online Savings for no fees whatsoever and easy mobile access. It is the most straightforward savings account to use when all you want to do is grow your money with zero conditions attached.
In CDs
If you’ve already built up a few thousand dollars in emergency savings, consider putting half of those savings in CDs, suggests Achtermann. With a CD, you have a chance to earn a higher interest rate in exchange for keeping your money tied up for a certain period of time, with term lengths ranging between three months and five years. On the date that your CD matures, or when your term length is over, you get your money back, in addition to the interest earned over time.
The best CDs
Top-rated CDs offer APYs higher than the national average, are FDIC-insured, have zero 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 untouched for five years, we recommend the Ally Bank Five-Year High Yield CD because 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.
In the market
Once you have a stable amount of savings set aside and zero outstanding high-interest debt (like credit card debt), invest the rest of your surplus cash from your checking account.
Achtermann suggests investor beginners look to Vanguard, specifically the Vanguard Total Stock Market Index Fund (VTI). This fund tracks the U.S. total market, including the large-, mid- and small-cap equity. It’s passively managed and the expense ratios are a super-low .03%. “For someone in their 20s or just getting started investing, it’s the one fund to start with,” he adds.
An IRA or Roth IRA are also good options for those looking to invest for retirement and want to take advantage of the many tax benefits the accounts have to offer.
How much is too much in your checking account?
While the exact amount of money consumers should keep in their checking really depends on each individual’s cash inflow and outflow, Cole provides a general guideline.
For those who are more disciplined about their discretionary expenses and not prone to overdrawing their account, just keep the exact amount of money needed to cover that current month’s expenses. Unless your bank requires a minimum balance, you don’t need to worry about certain thresholds.
On the other hand, if you are prone to overdraft fees, then 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: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.