You probably have a checking account, but do you know how much to keep? According to experts, there are downsides to keeping too little or too much money for audits.
While it’s undesirable to keep too little cash in a checking account and incur overdraft fees, Americans with too much cash in such a low-yielding repository could be leaving valuable interest behind. on the table.
One of the benefits of the Federal Reserve raising interest rates to their highest levels since 2008 is that individuals see greater gains on the money they save, i.e. if they store those dollars in the right place.
Here’s what you need to know about allocating funds between your checking and savings accounts.
Create a buffer to avoid overdrafts
Checking accounts are best used as a place to store funds for daily purchases and cash to pay monthly bills. It is easy to make deposits and withdraw money from these types of accounts using an ATM.
“Use this account for day-to-day transactions and keep enough to avoid fees,” Bankrate.com senior analyst Ted Rossman told CBS MoneyWatch.
Experts recommend storing enough cash to cover around two months of expenses plus a 30% buffer in a checking account.
“Current accounts are generally only used as operational accounts. Money is constantly being deposited and withdrawn, so you don’t want to miss too much money, but you also don’t want to make the mistake of leaving too much in it. ‘money,” said Shon Anderson, wealth strategist and president of Anderson Financial Strategies.
Owners of accounts that are too thin run the risk of overdraft and getting paid high fees.
In 2021, the average fee for overdrafting an account was a record $33.58, an increase of 22 cents over the past two years, according to a Bankrate investigation. These fees have generated significant profits for the big banks, to the tune of $9 billion a year in overdraft, ATM and other fees. according the Center for Responsible Credit.
“Things like that can really trigger a snowball effect on a bad financial situation,” Anderson said.
“Dead Money”
Don’t let your checking account get too bloated either, as this type of account usually doesn’t reward cardholders with interest.
“You don’t want to make the mistake of leaving too much money in there because it’s basically dead money,” Anderson said. “It is very rare to earn interest on a checking account.”
If you have excess money after calculating two months of expenses plus a buffer, the next step is to put two to four months of expenses into a high-interest savings account.
How much interest do savings accounts pay?
Smaller online institutions are currently advertising interest rates as high as 3.91%, compared to around 0.1% that larger banks tend to offer.
At this rate, with $10,000 in a savings account, you’d earn $390 more per year, risk-free.
“Deposit rates are the most attractive we’ve seen in years – it’s the silver lining of interest rate hikes,” Rossman said. “Small institutions compete on price and shoppers can certainly be rewarded.”
Because big banks’ deposits have soared as people hunkered down and saved money during the pandemic, they have no incentive to advertise attractive savings rates to consumers.
Even if you already have a savings account, research its annual rate of return and compare it to offers from other banks, as they can vary widely.
“Some banks can give out ridiculously low amounts just to say they’re paying interest. The big banks are notorious for that,” said Dallas-based Certified Financial Planner Katie Brewer. “The good news about high interest rates is that it shouldn’t be hard to get decent interest on the cash that’s left over.”
Lose interest
Not everyone knows how much of a role savings accounts can play in growing their own wealth.
Savers could have earned $42 billion more in interest in the third quarter of this year if they had kept the funds in high-yield savings accounts rather than accounts at big banks, according to a Wall Street Journal. analysis S&P Global Market Intelligence data.
“Part of it is a lack of knowledge, and some people don’t have the money to save,” said Courtney Richardson, investment advisor and founder of The Ivy Investor, an investing resource for women.
“Give yourself a cushion and put the rest of the money somewhere where you’ll get the most bang for your buck,” Richardson advised.
Certainly more than half of Americans earn between $100,000 and $150,000 direct from paycheck, according to loan cluband have no excess reserves to invest.
Bankrate’s Rossman urges them not to get discouraged.
“While we recommend six months of saved expenses, only 1 in 4 people have it,” he said. “But saving is a journey, not just a destination, and it’s the habit of saving that’s important.”