Dividing funds between different accounts
When you divvy up your money in various bank accounts, you may be confused as to how much you should keep in each particular account. Take a checking account for example. This is an account that pays minimal or no interest, so it doesn’t serve you any benefit to keep all of your money in this type of account.
We could say that one should keep $250,000 in their checking account. This is because it is the full amount that the Federal Deposit Insurance Corporation (FDIC) will insure your account for. But let’s be realistic; it is difficult to imagine that keeping a quarter of a million dollars in your checking account makes much sense, let alone the fact that most of us don’t even have that much money available!
Your Checking Account Balance
With the low interest rates offered by checking accounts, your goal for opening such an account should never be to accrue interest. Instead, it can be viewed as a better place to store your money than under your mattress.
You should keep sufficient money in your checking account that will allow you to pay your monthly bills and to have a little extra in order to have access to these funds when you need extra cash. In this way, you are able to avoid potential overdrafts. Any additional capital that you might have should be kept in other account types, such as a savings account, or even other investments. By keeping all your money in a checking account, this can quickly become a financial weak spot.
Do You Have an Emergency Fund?
Once you have deposited sufficient money into your checking account, you should then ask yourself whether or not you have an emergency fund? If yes, how large is it? Will it cover any emergencies? The standard requirement should be roughly 6 months’ worth of wages, so that way you can protect yourself from unemployment, illness, or just sudden and expensive surprises. If you do have an emergency fund in savings, you are being financially responsible. If you have however not started an emergency fund, the time to start is now. You should take a small portion of your checking account funds, and put them into a savings account, adding to it periodically to ensure you have enough money for any type of emergency.
Are There Better Investment Options?
Another reason you may not want to have all of your money in a checking account is that you may have the ability to invest it. For example, if you have $250,000 in your checking account, you would be wise to put a large amount of it in your retirement account, as it is tax-deferred, and it can grow. Otherwise, you could be looking at investing in rental property, or paying off debts. Money sitting in a checking account and earning no interest isn’t doing you any favors! Your checking account should only have money for your day-to-day expenses, and anything beyond that, you should be looking to make your money work for you.
The Real Reason for Checking Accounts
Let us not forget that the real reason for a checking account is to simply cover your monthly bills, with a little extra access cash when you need it, and of course, enough to avoid potential overdrafts. With everything else locked away in savings, you can also protect yourself from very serious financial crimes. For example, skimmers have been found on ATMs and gas stations that will read the information on your debit card. There has also been a rise in mass of data breaches in the last several years, including the retailer target. Because of this, you can protect yourself by avoiding keeping all of your money in one place, although, most banks today are excellent at protecting their customers funds and replacing money in an account that has been compromised.
Checking accounts simply weren’t made for saving, so don’t use them as such. This is what your savings accounts and your CDs are for. Your investment accounts and your speculation accounts can all fall into this category as well. Keeping some of your wealth in long-term investments also helps them to grow over the longer-term, building a better retirement for you as well as financial security.
Money kept in a checking account can be spent quickly. By keeping a large portion of your money outside of your checking account, you ensure that it isn’t as easily accessible, making unnecessary purchases just a little bit more difficult to accomplish. While it won’t stop you from buying the latest iPhone on a whim, it will, at the very least, make it a bit more difficult to do so than simply swiping a debit card!