What to Do If You Have More Than $5,000 in Your Checking Account

When it comes to deciding how much cash you should keep in your checking account , the right amount depends on your financial situation. That being said, there is a good chance that if you make $5,000 in checks (that is, $5,000 in liquid assets), your money could be put to better use elsewhere.

This is why you shouldn’t keep more cash than necessary in your checking account and what you should do with your money instead.

Why you shouldn’t keep too much money in a check

For our purposes today, let’s agree that $5,000 is a lot of money. At the very least, that’s a lot of money to keep in your checking account, where it earns little to no interest, which is far from ideal for growing or investing your money.

The rule of thumb is to always keep one or two months of living expenses in your checking account. You don’t want to cut this amount too close, so if you tend to get overdraft fees, you might need a little extra top-up.

But it does mean that if your monthly expenses don’t exceed $5,000, there are smarter places to store your hard-earned funds. We previously recommended splitting your money into multiple accounts, which will help you more easily distinguish and track progress towards your savings goals. In addition, it’s time to start investing, getting rid of debt and spreading your wealth in other directions.

What to do if you have too much cash on your check

Let’s take a look at the main accounts you need if your checking account is spending most of your change.

Put some in a high-yield savings account

Once you’re in a place where you can afford to focus on savings, a high-yield savings account is the main way to get at least some return on the funds you know will be available over the next one to five years.

Think of it this way: if you invest $500 in a mediocre savings account, you will earn $0.50 in interest in one year. With a high yield account with 2% APR, you will earn $10 on that $500, and the more time and money, the more interest . Here is our guide to choosing a high yield savings account .

Choose a short-term certificate of deposit

A certificate of deposit (CD) is another way to earn interest on your savings. They differ from traditional savings accounts in that they have a term component – they are usually offered for a period of three months to five years. Longer terms provide higher interest rates, but you can still make a decent return even if you don’t want your money tied to debt. The downside is that if you need to withdraw money from your account before the set time period, you will pay a penalty.

Top up your retirement accounts

If you’re not yet saving for retirement, the two main options to start with are IRAs and 401(k).

There are two main types of IRAs: Traditional and Roth. Simply put, with Roth IRAs, you are paying taxes on your savings right now. With traditional IRAs, you pay taxes later when you withdraw money in retirement. We wrote about the differences in more detail here , and we generally lean towards choosing a Roth account over a traditional IRA.

A 401(k) is a retirement savings account offered by your employer with significant tax benefits. If your workplace offers a 401(k) , aim to contribute between 10% and 20% of your salary. Here are our IRA and 401(k) opening guides. If you have a 401(k) account for your job, then you are well on your way to investing. Speaking of…

Open a brokerage account

While savings accounts are the choice for the money you’ll need in the next few years, an investment account is the vehicle to actually increase your net worth. A brokerage account is an investment account used to trade assets such as stocks, bonds, mutual funds, and exchange-traded funds. Setting up a brokerage account is simple and can be done through an investment firm like Vanguard or Fidelity .

If the very thought of investing in the stock market makes you nervous, I hear you. Any investment involves the acceptance of risk and the willingness to overcome the ups and downs of the market. But the simple fact is that your money will grow significantly more in a brokerage account than in a savings account. And for more passive, risk-averse investors (like yours truly), look to robo-advisers as the best “set it and forget it” tool. Here is our guide to investing .

It is important to understand, at least on a basic level, all the options available to you, depending on how much you can afford to save right now. Whether you’ve been accumulating cash all your life or getting a little extra green for the first time, you don’t want to miss out on the potential for big profits by leaving too much money in your checking account for too long. .