Are you storing too much money in your checking account?
That’s what Tony Armstrong at Nerd Wallet asked in an article for USA Today.
Too much money?!
If you’re thinking you want a large checking account, you’re certainly not alone.
But here’s the deal:
Sure, if you are like the average American and have over $5,000 in your checking account (doesn’t that seem high…?), that’s fantastic.
But there are a couple reasons why maximizing your savings is more than just stocking money away in a savings account.
Inflation & Earned Interest (or lack thereof)
Not only are you losing out on the opportunity to grow your money by keeping too much in a checking or savings account, but if you take a really long-term view, your money is actually losing value sitting there.
No, your account isn’t going to move from $2,000 to $1,500.
Rather, the value will be lost because the interest won’t keep up with inflation, which the government tries to keep around 2%.
Over the course of a year, you won’t really notice any affect. However if you look 10 years down the road, you’re certainly going to be noticing a difference.
Other accounts and investments that can get you a higher rate of return so you can keep up with or outpace inflation.
If you consider all of the accounts that earn more interest than checking and many savings accounts, you end up getting a pretty exhaustive list.
Despite the market upswing in the last few years, the recent Great Recession left a lot of people skeptical of investing. Or they want more cash on hand in case of emergencies.
Because of that, instead of keeping money in multiple spots, they store too much in their checking. It’s readily available and there is no real risk.
So how can you figure out how much money to keep in you checking account?
Well, you already know the individual steps, you just have to put them in the right context.
Make sure you have an accurate monthly budget/plan
A monthly budget will help you determine the expenses that you have each month. Not just bills, but also costs like food and transportation.
If you budget is inaccurate, you will obviously not have a great picture as to how much money goes out the door each month and you can’t plan to save.
You can’t anticipate how much money you should be keeping in checking and how much you can move to savings or another account.
Make sure you always have an accurate picture of your accounts and you will be well on your way to saving properly.
Understand that your checking account max should be flexible
Each month is going to be different, whether that’s because of expenses or variable income.
To reflect that, your checking account max should be flexible too. Don’t hold yourself to $1,000 just because it’s like that some months only to be faced with a large expense down the road and have to adjust.
While having a strong savings account & emergency fund can help address those issues, if you’re at a bank where they limit the number of transfers you can make from savings to checking, then a misstep could cost you a small amount of money.
Again, this all comes down to proactively planning
And last but not least, to save correctly you should be proactively saving.
This means budgeting at the beginning of the month, realizing what you can save (in various accounts, depending on your goals) and putting that money in as soon as you can.
Don’t wait until right before your next paycheck to see how much money you can spare.
Your savings should be your first priority and come above other expenses, not the other way around.