Many would argue there’s no such thing as “too much” money, but a huge checking balance might be a liability in disguise.
With good reason, you may have built up a large checking balance for bill pay, among other uses. But if you have no money in more productive accounts, it’s time to make a move.
Here are the warning signals your checking account balance may be too high.
1. You have more than two months’ spending
Checking accounts are best used for short-term goals, like accepting deposited income and making ongoing payments.
Before transfers or withdrawals, this account should generally cover about two months’ of your spending — just a bit more than your monthly bill-pay cycle.
According to the St. Louis Fed, the national average interest rate for checking accounts that earn interest is just 0.08%, with no tax benefits.
A bank account with better interest — although still low enough to effectively lower in real terms thanks to high inflation — could earn thousands in interest.
Using a reward checking account or high yield savings account (HYSA), for example, may make much more sense if you often carry a higher balance and want to keep some spending liquidity.
2. You don’t have a separate emergency fund
As mentioned above, if you keep all your money, including emergency savings, in your checking account, you’re leaving easy money on the table.
Besides that, having excess money in your savings account could lead to impulse buys or just plain unnecessary purchases.
If you have months’ worth of money in your checking, and no designated emergency fund, put the excess into a HYSA like Sofi, just deposit $5,000 within the first 30 days to get your $300 sign-up bonus or certificate of deposit renewals or even just open a new CD.
3. You have low or no retirement savings
Of course, retirement is the ultimate long-term expense you need to prepare for.
Low retirement account balances can’t benefit from compounding interest before retirement comes. Fill them up!
And consider stocks for at least part of those retirement savings. The S&P 500 stock market index has gained an annual average of about 10% annually over time. That’s important to beat inflation.
Not sure how to invest in stocks? No problem. Work with a professional — it’s totally worth it. A Vanguard study found that, on average, a hypothetical $500,000 investment over 25 years would grow to $1.7 million if you manage it yourself, but more than $3.4 million if you work with a financial advisor. That’s twice as much!
If you’ve got at least $100,000 in investments, check out a free service called SmartAsset. You fill out a short questionnaire and instantly get matched with up to three vetted financial advisors in your area, all legally bound to work in your best interests.
Please carefully review the methodologies employed in the Vanguard white paper, “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha.”
4. You’re not using a spending plan
As we mentioned above, with a fat checking account and no spending plan, you could easily spend more than you intend.
The more you know about your spending, the more you may be able to set more of your income aside. A budget will help you to allocate income currently in a checking account to both spending and saving.
It will also highlight expenses you can focus on to find savings. For example, you could be throwing away $852 annually on your car insurance by paying too much.
It’s not hard to discover if you’re overpaying. With just a few clicks, you can find out.
5. You’ll be retiring in less than ten years
If you’re getting close to retirement with a ton of money in your checking account, put some of that money elsewhere.
As you now know, the national average for checking account interest is essentially zero. That’s an opportunity cost for anyone saving solely in checking accounts — especially if their timeframe is already short.
Retirement accounts have tax benefits. That’s why they’re the best place to earn 10%, compared to just 1% or 2%.
There are also other types of investments that offer tax-deferred growth. , can do something CDs can’t — they can earn more interest than CDs, defer the taxes on that interest, and when the time comes, be converted into a stable monthly income for life.
Ready to learn more? If you’re 50 or older, get unbiased advice and info at Annuity.org. If you like what you see, schedule a free consultation with a retirement planning advisor.
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