Keeping an Extra 20K in Your Checking Account? Here's Where You Should Move It
KEY POINTS
- If you keep your extra savings in a checking account, you likely won't earn interest.
- If you move your emergency savings to a savings account that earns interest, you'll earn money while your cash sits in the bank.
- By keeping $20,000 in a high-yield savings account, you could earn $930 in a year.
Having some extra cash in your checking account is smart. If an unexpected expense comes up or an automated bill is more costly than planned, your extra money can serve as a buffer. But you don't want to keep all your extra cash in a checking account.
Why? Most checking accounts don't earn interest -- so you won't earn much of anything while your money sits in the bank. Do you have an extra $20,000 stashed in your checking account? I'll explain why you may want to move that money to a high-yield savings account instead.
Help your money grow with interest
Most checking accounts don't offer rewards or interest, so there's not much incentive to keep your savings in this type of account. However, if you move your emergency fund savings into a bank account that earns interest, your money will grow as it sits in the bank.
When considering savings accounts, check the annual percentage yields (APYs). Banks use APY to describe the results you can expect from keeping your money in a savings account for one year. Since rates can vary, it's essential to compare rates so you can maximize your earnings.
Don't miss out on extra cash
Are you wondering how much interest you're missing out on by keeping an extra $20,000 in your checking account? It may be much more than you think. In the below table, I'll show you how much money you could earn by transferring your $20,000 in savings to a high-yield savings account for one year.
Here's how to calculate how much interest you'll earn: Multiply your deposit ($20,000) by the APY your bank offers. Doing this will show you how much interest you'll earn if you keep the money in your savings account for one year.
I used a 4.65% APY for a high-yield savings account for the following calculations. The accounts on our best high-yield savings accounts list have APYs currently ranging from 4.25% to 5.25%. These are typical rates currently available to customers.
| Bank account type | Interest earned after one year |
|---|---|
| Checking account (0% APY) | $0 |
| High-yield savings account (4.65% APY) | $930 |
You can earn even more with compound interest
Earning $930 in interest in one year is a lot better than earning $0 from keeping your savings in a checking account. But you can earn even more than that over the long term.
The longer you keep your extra savings in the bank, the more you can make, thanks to compound interest -- which is interest you earn on interest.
To illustrate how compound interest works, I'll show you how much money you can earn by keeping your initial $20,000 deposit in a high-yield savings account for anywhere from one to three years.
Keep in mind that the below calculations assume you make no additional contributions beyond your initial deposit. However, you can boost your earnings if you continue to put more money into your account. You may want to automate the savings process to save yourself time.
Here's a breakdown of your potential earnings:
| Year | Starting balance | Interest earned | Ending balance |
|---|---|---|---|
| 1 | $20,000 | $930 | $20,930 |
| 2 | $20,930 | $973.25 | $21,903.25 |
| 3 | $21,903.25 | $1,018.50 | $22,921.75 |
That's $2,921.75 earned in three years, assuming the APY on your savings account doesn't change. It's worth mentioning that APYs can change over time, so your APY will likely fluctuate.
So, what are you waiting for? Move that extra $20,000 into a high-yield savings account. Taking this one step can be a major win for your personal finances.
Our Research Expert
Natasha is a freelance writer who specializes in personal finance, credit card, credit card rewards, and travel hacking content.
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