Here's why you shouldn't keep all your money in a checking account (2024)

FAQs

Here's why you shouldn't keep all your money in a checking account? ›

They also aren't a good place to store all your cash for these reasons: Low interest rates: Even the very best checking account pays less in interest than an online savings account or money market account. You want to keep most of your cash where it earns the most interest. A checking account is not that place.

Risks of Keeping Too Much Money in Your Checking Account

One reason is that it isn't going to earn you much interest. The national average for interest-bearing checking accounts is 0.07% APY. Compare that to a high-yield savings account that can earn as high as 5.00% APY or more.

Keeping too much of your money in savings could mean missing out on the chance to earn higher returns elsewhere. It's also important to keep FDIC limits in mind. Anything over $250,000 in savings may not be protected in the rare event that your bank fails.

Keeping one to two months' of expenses in checking can help you to stay ahead of monthly bills. You're also less likely to get stuck with overdraft fees, since you have a buffer in your account. Maintaining higher balances in checking can put you at a disadvantage if you're not earning any interest on your money.

As long as that bank is FDIC-insured and your deposit doesn't exceed $250,000, you should be safe to do so. It might be worth it to maintain an account at a separate bank, however, just in case a bank error or accidental account freeze results in a loss of access to your money for a time.

One of the major reasons why keeping a lot of money in a savings account might not be a wise decision is the change in repo rates. Banks often change their interest rates based on repo rates and it directly impacts the savings accounts.

Also, a savings account won't give you any sort of tax break on your money. The interest you earn on your money will be taxed at the same rate as ordinary income -- the highest rate you're subject to. A better bet is to save for retirement in an account like an IRA, where your contributions go in tax-free.

Lower potential returns compared to investing. Potential for savings accounts to fail to keep up with inflation, eroding your purchasing power over medium- and long-term time horizons.

Banking regulation has changed over the last 100 years to provide more protection to consumers. You can keep money in a bank account during a recession and it will be safe through FDIC and NCUA deposit insurance. Up to $250,000 is secure in individual bank accounts and $500,000 is safe in joint bank accounts.

In the long run, your cash loses its value and purchasing power. Another red flag that you have too much cash in your savings account is if you exceed the $250,000 limit set by the Federal Deposit Insurance Corporation (FDIC) — obviously not a concern for the average saver.

Do millionaires keep their money in checking account? ›

“Millionaires' checking accounts are all over the place,” Thompson said. “Some clients will only keep enough to pay for immediate expenses (e.g., $10,000) and others will have $150,000 in checking on any given day.”

Unless your bank requires a minimum balance, you don't need to worry about certain thresholds. On the other hand, if you are prone to overdraft fees, then add a little cushion for yourself. Even with a cushion, Cole recommends keeping no more than two months of living expenses in your checking account.

The general rule of thumb is to try to have one or two months' of living expenses in it at all times. Some experts recommend adding 30 percent to this number as an extra cushion.

Money in a checking account is easy to access, and keeping balances above the bare minimum can help you avoid monthly maintenance fees. But having a bloated checking account means you're missing out on higher returns in a savings or retirement account.

Cash equivalents are financial instruments that are almost as liquid as cash and are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills. Some millionaires keep their cash in Treasury bills.

So, regardless of any other factors, you generally shouldn't keep more than $250,000 in any insured deposit account.

You don't want to keep your money at the bank because: It just degrades in value due to inflation. Your money isn't “working” for you. You can invest your money into growth assets rather then it sitting there.

Savings account benefits include safety for your savings, interest earnings and easy access to your money. However, savings accounts may have drawbacks, such as variable interest rates, minimum balance requirements and fees.

As long as your deposit accounts are at banks or credit unions that are federally insured and your balances are within the insurance limits, your money is safe. Banks are a reliable place to keep your money protected from theft, loss and natural disasters. Cash is usually safer in a bank than it is outside of a bank.

And there's virtually no risk of losses if the money is in an FDIC-insured bank account. If you don't have an emergency fund, you should probably build one even before putting your savings money toward retirement or other goals.