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How Much Should You Keep In Your Checking Account
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Keeping too much in your checking account isn’t ideal for two reasons: First, having such easy access means you might be tempted to spend it. Plus, checking accounts don’t earn much (if any) interest, so your money won’t grow there. Having too much money in your checking account could mean you’re leaving money — even a little — on the table.
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Financial planner Marci Bair of Bair Financial Planning in San Diego, California, says she recommends that anyone on a fixed income keep track of “no more than about two months of expenses” at a time.
If you have a month or two to spend and suspect you’re spending too much, look for the following signs. If they sound familiar, it’s probably time to move your money elsewhere.
If you don’t have a plan for your money, you’re more likely to leave it in a checking account and wait to see what happens. This is not an efficient way to build wealth.
Instead, decide how much you want to see for each of your financial goals and set up an automatic transfer from your checking account to your savings, retirement, and investment accounts each month.
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A plan can help you realize your dreams, and you can save what you need while directing the rest towards other goals and greater opportunities for growth.
A sign that you have too much money starts with a good thing: you’ve already built up your entire emergency fund and have money left over. In general, an emergency fund consists of about six months’ worth of expenses kept in a safe but liquid place, such as a high-yield savings account.
Once this account is established, it can be tempting to leave excess money in your checking account. But Bair says there are other ways to make money work. “The rest goes into CDs and then into a balanced investment portfolio,” he says.
It’s one thing to neglect financial goals when the money just isn’t there. It’s another thing to neglect your goals when you have the money to advance. If your savings and retirement accounts aren’t growing, but your checking account is growing, you could be in trouble.
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If your checking account is growing while your IRA, 401(k) or savings account is flat, you probably have too much money in your checking account. Thanks to compound interest rates, time is of the essence when it comes to retirement planning (and indeed any saving). If you have money to save, you should put it in an account that will benefit you as soon as possible.
Consider setting up automatic transfers from your checking account or having money deducted from your paycheck to help you reach your financial goals.
If you have a sizable checking account but aren’t taking advantage of opportunities like your employer’s 401(k) match, you may have too much money. A match, where your employer matches your 401(k) contributions up to a certain percentage, is like “free money,” and that extra money from your checking account would serve you better in your retirement account.
Or maybe you haven’t considered another savings or investment account, such as a health savings account, a tax-deferred account for qualified medical expenses that you can roll over from year to year and use for additional retirement savings in the future. Anyone with a high-deductible health plan is eligible, and some extra money in an HSA would go a long way toward building wealth beyond your checking account.
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The average checking account has an interest rate of 0.03%, according to the FDIC. This is much lower than the typical interest rate on a high-yield savings account, which is as low as 0.5%.
And that pales in comparison to the stock market’s 10% average annual return, meaning a retirement account or other long-term investment account could grow even more. If you leave money in a checking account, you may miss out on more growth. If you don’t like it, it’s time to put it down.
“I have customers who think they don’t have too much in their checking account,” says Bair, “but when they see the low interest rate they’re getting and what they could be getting in interest, we’ll usually move something up.”
Editor’s note: Any opinion, analysis, review or recommendation expressed in this article is solely the author’s and has not been reviewed, approved or otherwise endorsed by any card issuer. Read our editorial standards.
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If you’ve ever wondered, “How many bank accounts should I have?” or you’ve struggled with managing your money in general, you’re not alone.
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First, by strategically opening multiple bank accounts, you can take advantage of timely promotional offers and ensure that you always receive the best interest rate on your deposit.
The answer to the number of bank accounts you should have depends on your particular situation. Most people get by with just a few bank accounts at first.
As your needs change, you may find it easier to plan your money with multiple accounts. Let’s talk about what these accounts are and how to use them.
Almost everyone knows that they need at least one checking account to store cash for daily use. Single people and married couples who manage their finances together may only need one checking account.
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However, some married couples find that having two checking accounts is best for splitting finances. If one spouse is a saver and the other is a saver, this can be a good solution. Of course, the spouses then have to manage their current accounts independently.
One or both partners must also have a third joint checking account to pay joint bills such as utilities, rent/mortgage, etc. This account setup adds a new complexity to the situation, but for some people the pros outweigh the cons.
Savings accounts generally offer a number of useful benefits tailored to the workplace. For example, savings accounts offer higher interest rates and have limits on how often you can withdraw money. Separating your savings from your spending money (i.e. your checking account) will also ensure that you don’t accidentally spend your money on impulse purchases.
Most people also have at least one savings account. However, if you live paycheck to paycheck, often go into debt, or want to plan things better, you may find that you have multiple savings accounts for different purposes. This is known as
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