People keep large sums of money in their checking accounts without knowing the pitfalls. Keeping huge amounts of money in the checking accounts could lead to risks of debit cards and wash checks. If that is not scary enough, you could be tempted to spend it because the money is easily accessible and the cost of living and inflation will always rise faster than the interest you earn on your money in your bank account. Hence, it is advisable to keep a limited amount in the checking account to minimize the risks.
If you are not sure you have too much money in your checking account, read on to know the signs.
Regularly Exceeding FDIC Insurance Limits
The Federal Deposit Insurance Corporation (FDIC) insures bank deposits up to $250,000 per depositor per bank. If your checking account balance frequently exceeds this limit, any amount over $250,000 is at risk if the bank fails.
During economic downturns or financial crises, keeping excess funds in your checking account means exposing a significant portion of your money to unnecessary risk. According to Statista, U.S. banks held over $17.83 trillion in deposits as of 2023, underscoring the importance of spreading your funds across insured accounts or other investment options for safety.
Your Money Isn’t Growing
Checking accounts offer little to no interest. Even high-yield checking accounts rarely exceed a 1% annual percentage yield (APY). Compare this to inflation, which has increased from 3.2% in 2011 to 8.3% in 2022, according to Statista. In simplified terms, your money loses purchasing power when left idle in a checking account.
Using Your Checking Account As An Emergency Fund
While it is wise to have an emergency fund, parking the entire amount in a checking account may not be ideal. Consider transferring it to a high-yield savings account or a money market account. According to Bankrate, the average savings account offers significantly better interest rates than a checking account, making it a smarter option for emergency savings.
Frequently Paying Account Fees
Many checking accounts come with monthly service fees, ATM charges, and overdraft penalties, all of which can add up significantly over time. Americans pay $167 annually in checking account fees. Large account balances don’t always exempt you from these fees, and in some cases, banks charge additional fees for higher-tier accounts. By keeping a smaller and more manageable balance, you can avoid these unnecessary costs and redirect that money toward savings or investments. It is also advisable to review your bank’s fee schedule from time to time.
Struggling To Budget Effectively
Having easy access to money in your checking account can tempt you to overspend. Keeping too much money in your checking account can lead to your expenses expanding and eating up your finances meant for long-term needs. Creating separate accounts for savings, investments, and recurring expenses can help curb unnecessary spending.
Paying Bills From A Single Account
Using your checking account as the sole source for paying bills can complicate budgeting and financial planning. Setting up a dedicated account for bills ensures you won’t accidentally overspend or mix personal savings with recurring expenses.
Not Diversifying Your Finances
Relying solely on a checking account for your financial needs can limit your ability to diversify. Spreading your money across different financial tools, such as retirement accounts, savings accounts, and investment portfolios like stocks, bonds, or mutual funds, reduces risk and maximizes growth. The American households have $18 trillion in liquid assets, a significant portion of which could be allocated more effectively.
Not Maximizing Financial Tools
Financial tools like automatic transfers, budgeting apps, and spending trackers can help you allocate excess funds to more productive uses. If you are not using any of them, it shows you have too much money in the checking account often leading to inefficient money management.
Frequently Facing Security Risks
Checking accounts are more vulnerable to fraud than other financial tools. Debit cards linked to checking accounts can be compromised, and fraudulent transactions may take weeks to resolve. According to the Federal Trade Commission (FTC), there were 1.1 million reports of identity theft in 2022, many of which involved compromised bank accounts. If you have faced these issues in the recent past, it is a sure sign that you are keeping too much money in the checking account.
Stagnant Savings Goals
If you are keeping too much money in your checking account, chances are your savings goals are falling behind. Whether you are saving for a down payment on a home, a vacation, or retirement, investing excess funds into dedicated savings accounts with higher interest rates can help you reach your goals faster.
Not Taking Advantage Of Tax-Advantaged Accounts
Leaving large sums in a checking account means you are missing out on the tax benefits of accounts like IRAs or HSAs. For example, contributing to a Roth IRA allows your investments to grow tax-free. According to the Internal Revenue Service (IRS), in 2023, the maximum contribution limit for IRAs was increased to $6,500 and $7,500 for people aged 50 or older, providing significant tax-saving potential.
Using It For Long-Term Storage
Checking accounts are the place to keep the money that you need to pay monthly bills and some allowance for personal spending. They are not designed for long-term storage of large sums of money. Over time, inflation erodes the value of cash. Investing in long-term options like certificates of deposit (CDs) or Treasury bonds offers better returns while protecting your principal.
Not Monitoring Your Account Activity Regularly
If your checking account balance is always high, you may become less vigilant about monitoring transactions. This could leave you vulnerable to unnoticed fraudulent activity or bank errors. 20% of Americans check their bank accounts less than once a month, increasing their financial risk.
