Do you keep a lot of money in your checking account?

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Why having too much money in your checking account is a bad thing

You may think that keeping a lot of money in your checking account is a smart idea, and it’s certainly better than hiding your money under the mattress. But keeping too much money in your checking account could hold you back. Here’s why:

• You lose growth: Most checking accounts pay very little or no interest, which means that not only does your balance not grow, but inflation actually reduces its value over time.
• They are linked to your debit card: This gives you easy access to your money, which is less of a barrier to the temptation to spend it, especially if you see a large balance in your account. You may be encouraged to spend more than you want or can afford.
• Some of these funds may not be safe: Large balances are not protected by the Federal Deposit Insurance Corporation (FDIC) in the event of a bank failure. The agency protects deposits of up to $250,000 per depositor, per institution, and per ownership class. If your balance is greater than this, excess funds will not be covered.

How much money should you keep in your checking account?

If a checking account isn’t the best place to store your money, how much should it be? The exact amount depends on your financial situation, monthly bills and monthly deposits.

“Maintaining a minimum average of expenses for one month can help prevent overdrafts,” Roger Young, director of thought leadership at T. Rowe Price, said in an email. “When calculating this average, you should take into account expenses that are sporadic or paid over a longer cycle.”

Simply put, your account should have enough to cover your monthly expenses plus any additional expenses, such as auto insurance, home insurance, and property taxes when they are due. Also make sure you meet the minimum balance requirements in your checking account to avoid monthly fees.

Where should you keep anything more?

If you have excess cash, the best thing you can do is save it or invest it in vehicles that allow it to grow. In addition to earning interest, you are also diversifying your holdings and may gain some tax advantages. Here are some suggestions.

High-yield savings accounts or money market accounts

Consider keeping some of that cash in a savings account. You can get a great rate by opening a high-yield savings account or money market account at a bank, credit union, or online financial institution. The best savings accounts pay annual percentage rates (APYs) of up to 5.00%.

“Savings accounts can be used to keep this money separate, with easy access when necessary,” Young said. “Now that interest rates are higher than earlier in the decade, there are savings accounts with reasonable returns to consider.”

Savings accounts are a highly liquid vehicle, which means you can easily withdraw your money when you need it, especially in emergency situations. Money market accounts are similar, but they also allow you to write paper checks. Both are also insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) up to $250,000 per depositor, per insured bank or credit union per account.

Certificates of Deposit (CDs)

Certificates of deposit (CDs) hold your money for a certain period in exchange for a fixed interest rate. The duration ranges from a few months to 10 years.

What makes CDs different from savings accounts is that your money — along with a guaranteed interest rate — is locked in for the duration. If you withdraw funds before then, you will pay an early withdrawal fee, which can be significant.

The upside is that you don’t have to worry about savings rates falling because your interest rate is fixed for months or years. Therefore, a CD is a great option if you know you won’t need the money before the due date. Like savings accounts, these vehicles are insured by the FDIC or NCUA up to $250,000 per vehicle per depositor.

Keep in mind that returns on savings instruments (such as CDs and savings accounts) tend to follow changes the Federal Reserve makes to the federal funds rate. So, when the Fed raises this benchmark rate, the yields that banks and credit unions offer for new CDs tend to rise as well. The opposite is true if federal interest rates fall. If you lock in a price for a CD before the Fed changes its rate, you lock in that price for the duration. But the same rule does not apply to savings accounts.

Retirement accounts

Saving for retirement is the second most important thing after emergency planning. There are multiple options to consider:

• 401(k) or 403(b): If you have an employer-sponsored retirement plan, such as a 401(k) or 403(b), take advantage of it early in your career so you can take advantage of compound interest growth. You can use pre-tax money to fund the account, and you can contribute up to $23,500 in 2025, with a catch-up contribution of $7,500 if you’re 50 or older. Even if you can’t meet your total contribution limits, try to contribute at least enough to meet your employer’s maximum.
• Traditional IRA: Whether you have access to an employer-sponsored plan or not, you can invest in your future by opening an individual retirement account (IRA). You can invest in a traditional IRA as long as you earn income. The contribution limit for 2025 is $7,000, plus an additional $1,000 if you’re 50 or older. As with a 401(k), your contributions are tax deductible; You don’t pay taxes until you start making withdrawals.
• Roth IRA: You can also contribute to a Roth IRA. Your contribution limit is based on your modified adjusted gross income (MAGI). The full contribution limit is $7,000 plus an additional $1,000 if you’re 50 or older (and if you contribute to both a Roth and traditional IRA, your total limit is $7,000 plus a $1,000 catch-up contribution if you qualify). Your eligibility to contribute to a Roth ends completely if your MAGI reaches a certain threshold ($150,000 for an individual in 2025). Roth IRAs require after-tax contributions, but earnings grow tax-free, and you don’t pay taxes when the funds are used for qualified withdrawals.

Brokerage accounts

If you’ve filled your emergency fund and maxed out your tax-advantaged retirement accounts, you may want to open a brokerage account. A brokerage account is a non-tax-advantaged account that allows you to buy and sell various securities such as stocks, bonds, exchange-traded funds (ETFs), and mutual funds. Brokerage accounts can help you save when you max out your tax-advantaged options. You can choose from different types of mediation based on your needs:

• Full-service brokerage firms offer a range of services, including portfolio management, advice and research. Keep in mind that all of this comes at a cost; These companies charge higher fees and commissions.
• Discount brokerages charge lower fees because they allow you to place your trades online through a self-directed platform.
• Robo-advisors are digital platforms that give you automated financial planning and investment services using algorithms with little to no human input.

Bonds can be a great option if you don’t want to take on a lot of risk. They can be purchased in a brokerage account.

“If you want to stay fairly conservative, you might consider short-term or ultra-short-term bond funds,” Young said, adding that municipal bonds and bond funds may be a great option if you’re in a higher tax bracket. These investments may be exempt from federal and some state taxes.

Bottom line

Checking accounts can help you manage your daily financial transactions. But it’s not meant to save, whether it’s for a rainy day or for the future. Savings accounts, investment vehicles, and retirement accounts can help you put your money to better use. These benefits can give you the benefit of earning interest, and some offer you tax advantages. If you’re not sure how to make your money work for you, consider speaking with a financial expert who can guide you in the right direction.