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Checking accounts are incredibly helpful each day, but how much should you be leaving in the account? There are pros and cons to Checking, Savings, Money Market and investments. And there are clear disadvantages to leaving too much in Checking.
Useful though it is, it is unwise to keep all of one’s available money in a checking account.
Too Many Eggs in One Basket
In part, this is an eggs-in-one-basket issue. Many people have a great sense of security about the money they leave in banks, because, after all, checking accounts in banks are federally insured, up to $250,000 per depositor.
Perhaps too complacent a sense of security has developed among depositors in checking accounts in the 90 years since the insurance system was first put into place. Because, after all, one can suffer at least two types of loss by keeping money in a checking account. First, one can lose the value of one’s money to inflation. If one keeps $1,000 in a checking account — or any bank account with low or no interest rate — through a period of time in which the value of the dollar drops by 10%, then one has lost a real value of $100.
The second type of loss you can suffer from checking accounts is an opportunity cost. This is the economist’s turn for missing out on the potential benefits of another course of action. There are, after all, many good investments — including quite low-risk through uninsured benefits — on which you have missed out by keeping that $1,000 in the bank. You might have put some of that $1,000 in a high-yield savings account: which, by the way, are also covered by deposit insurance.
Too Tempting To Withdraw at Anytime
Beyond both of those points, there is a psychological reason why keeping too much money in a checking account can be a bad idea. Temptation. It is too easy to spend it. In the 21st century, after all, one no longer even has to sit down and fill in a check, and then put a stamp on an envelope in order to spend the money in one’s banking account. You can simply press a few buttons on your laptop and — voila! The money is Amazon’s, and the socks are on their way.
One rule of thumb for saving money is that spending money should be a little difficult. Using one’s checking account only as a waiting room for small amounts of cash, no more perhaps that one plans to spend over the course of a month, and investing excess cash in at least something less liquid forms, can be a much healthier habit.
Even with savings accounts, there is some valuable illiquidity. Regulations limit them to six transactions a month.
Considering these points: how much should you have in your checking account? A writer on Credit Karma’s website has suggested that one ought to have an amount equal to two months’ spending. That is enough to cover one’s bills, perhaps a reasonable amount of luxury or even impulse spending, while creating a cushion against accidentally bouncing checks.
The Larger Emergency Fund
Beyond that two-month amount, though, students of the subject generally suggest that a larger emergency fund (consisting perhaps of about six months of expected expenses) can find a rightly place in a savings account. Citi, for example, offers a savings account with an APR of 0.5%, compounded daily, with no minimum deposit, though there is a monthly fee of $4.50. Marcus by Goldman Sachs offers the same rate, compounded daily, without minimum deposit or fee.