Why Keeping Extra Cash in Your Checking Account Can Be Beneficial
It’s wise to maintain a little extra in your checking account—beyond just what you need for your monthly bills. Life can be unpredictable; grocery bills can fluctuate, utility costs might spike, and unforeseen expenses can arise. Having a buffer ensures you’re prepared for those months when your expenses exceed your budget.
How Much Should You Actually Keep in Your Checking Account?
As a general rule of thumb, it’s advisable to keep enough in your checking account to cover two months’ worth of bills. This approach gives you some leeway if your next paycheck is delayed or if unexpected costs arise. For instance, if your monthly bills total $3,500, keeping around $7,000 in your checking account would provide a comfortable cushion.
Exploring High-Yield Savings Accounts
While it’s essential to maintain a balance in your checking account for expenses, you don’t want to keep excessive amounts there. For example, if you have $10,000 sitting in your checking account when your necessary expenses are just $3,500, you might be missing out on potential interest earnings. Instead, consider moving excess funds into a high-yield savings account. Here are a few options:
- American Express® High Yield Savings Account
- APY: 4.00%
- Minimum Balance: $0
- This account allows you to earn interest on your savings while still providing easy access to your funds.
- Capital One 360 Performance Savings
- APY: 4.00%
- Minimum Balance: $0
- Another great choice for earning competitive interest without any monthly fees.
- CIT Platinum Savings Account
- APY: 4.70% for balances of $5,000 or more
- Minimum Balance to Open: $100
- This account offers a higher yield if you can maintain a minimum balance.
When to Consider Other Investment Options
If you have an adequate emergency fund that covers at least three months of necessary expenses, it may be time to explore other investment vehicles. Here are a few options to consider for your excess funds:
- Certificates of Deposit (CDs): CDs allow you to lock in a guaranteed interest rate for a specific period. This can be a great way to earn more on your savings without the risks associated with the stock market.
- Brokerage Accounts: Investing in a brokerage account gives you the opportunity to grow your wealth by investing in stocks, bonds, and other assets. Historically, the S&P 500 has averaged a 10% annual return over the last 50 years, outperforming typical savings account interest rates.
- Individual Retirement Accounts (IRAs): If you’re looking to save for retirement, consider contributing to an IRA. This account type offers tax advantages and can help your money grow over time.
Balancing Your Finances for Optimal Results
Ultimately, the right balance in your checking account depends on your individual financial situation and spending habits. If you find yourself holding onto $10,000 when your two-month bill total is much lower, it might be wise to consider reallocating some of those funds into one of the higher-yield options mentioned above. By strategically managing your finances, you can optimize your savings and potentially grow your wealth over time.
