Observe the Minimum on Your Checking Account

While many Americans rely on the next stimulus package , if you no longer live paycheck to paycheck, it’s time to withdraw that money from your checking account.

Why? Because while some checking accounts do offer interest these days, your cash will likely make you more money in a savings account, money market account, CD, or brokerage account.

Right now, I’m trying to maintain a $ 3,000 checking account balance – a figure meant to cover a little more than my typical $ 2,500 a month. I also maintain a $ 10,000 savings account balance; it serves as a four-month emergency fund and provides protection against temporary lulls in revenues or late payments.

I have a separate savings account where I hide the money to channel it towards settlement taxes, and every second dollar I earn is invested – either in my traditional IRA, or in my SEP IRA, or in my HSA, or in my brokerage account. not related to retirement.

As Laura Muñoz explains in her book The Financial Diet , this money move is life-changing:

[…] once I realized that I didn’t have to pay everything with my debit card, I also realized that the money in the debit account just, well, stays there. It doesn’t pay interest and doesn’t work for you, so there is no real reason to store more than a healthy buffer in there in case you need to withdraw cash as a last resort. Now my cash is in two places: in a high yield savings account, which charges interest without any risk, and in another savings account, which is invested in the stock market, where there is more risk and potential reward.

Yes, placing money in the market – even in a money market account – carries a certain amount of risk, especially in the context of a pandemic. This is why personal finance experts recommend keeping your emergency fund in cash, not an investment. Since market crashes are often associated with recessions, keeping some of your money in a savings account can help protect you if, for example, your investment plummets right before you leave.

Keeping extra money in a checking account can also protect you from a market crash, of course – if that money is still in a checking account when you need it. If you are the type of person who uses your current account balance as a way to determine how much you can spend, you may end up spending whatever is in your account. Limiting the amount of money in your checking account gives you more information about how much you are spending and how often you need to transfer money from your savings to cover your day-to-day expenses (or pay your credit card bill). You can easily transfer money from a savings account to a checking account as a last resort as most banks allow 6 transfers per month with no fees or penalties. If you’re lucky you don’t need money in your savings account, it will probably bring in about 0.1% interest, depending on your bank – better than 0.06% on many checking accounts, or no interest at all. …

So keep a minimum in your checking account, no matter how much you earn. Think of it as a large-scale version of the envelope system, where your checking account is a giant envelope that contains all the money you can spend that month.

Then, channel the rest of your income somewhere where it can make more money for you, because this is one of the best ways to increase your net worth.

This article was originally published in 2019 and was updated on July 28, 2020 to reflect the pandemic and provide more information on savings accounts.

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