Why You Should Keep as Little Money as Possible in Your Checking Account Right Now

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KEY POINTS

  • With inflation up, it's a good idea to keep your extra cash in an interest-bearing account.
  • Look into high-yield savings accounts, money market accounts, or CDs.

There are better places for your hard-earned dough.

Many people have a checking account. It's a useful place to receive direct deposit payments, and you can use it for bill pay and to store money for your short-term needs. Here's the thing, though: checking accounts are generally a bad place to keep much more money than you need to pay your expected bills. Why is that? Inflation! Recent numbers from the U.S. Bureau of Labor Statistics' Consumer Price Index Summary show inflation up 8.3% from this time last year.

If you have money sitting in your checking account that you would prefer to keep as cash (as opposed to putting it into a brokerage account), it's actively losing value. I realize this is a scary thought, but there are a few moves you could make right now that will help your money grow, rather than shrink. Check out these other places to keep your excess cash.

A high-yield savings account

You might have a savings account; a lot of people do, and it is in fact the first type of financial account many people will get, when they're kids! But do you have a high-yield savings account? I didn't open one of these accounts until earlier this year, when I found myself freelancing and in need of a short-term place to keep my tax payments. Online banks, in particular, will likely offer you a higher APY (annual percentage yield) on the money you stash in their savings accounts than you might get from a brick-and-mortar bank. That extra bit of growth in your money won't match the current inflation rate, but it'll certainly be better than leaving it in your checking account (which likely earns very little interest, if any at all). A high-yield savings account is a great place for your emergency fund.

A money market account

Another possibility for any extra money you may be keeping in your checking is a money market account. These accounts share some similarities (such as similar APYs) with a high-yield savings account, but you'll often be issued a debit card or have the ability to write checks to access your money in the account automatically, without needing a linked checking account. The savings account I opened earlier this year didn't give me easy access to my money; I ended up adding a checking account and then I had to request a debit card (which was sent to me for free, at least).

Money market accounts are almost like a cross between a checking and a savings account. It's likely not a fit for you if you'll need to access your money frequently; both savings and money market accounts fall under Regulation D, which sets limits for how many withdrawals and transfers you can make from the account each month.

A certificate of deposit (CD)

If you've got a chunk of money hanging out in your checking account, and you suspect you'll need it within the next few months or years, you might consider putting it into a certificate of deposit (CD). This special type of bank account will pay you a fixed rate of interest on your money, in exchange for locking it up for a set period of time. CD terms can range from a few months all the way up to several years, and the interest is paid monthly or quarterly. It's best to leave any money in a CD alone for the duration of the term, however, as you'll have to pay a penalty for withdrawing it early (and you'll have to withdraw all of it at once).

CDs can be a bit of a gamble, as you'll be stuck with whatever interest rate you lock it in at. So CDs aren't for everyone, but they are a very safe place for your money, as they are FDIC insured, unlike investment accounts.

If you've got money you don't want to invest for long-term gains, it's a good idea to find a home for it outside of your checking account, especially right now. Do leave yourself some cash buffer in that account, however; having an extra $100 or $200 is a great way to avoid accidentally overdrafting your account if a bill is higher than expected or you have a surprise expense. You can also look into overdraft protection. Otherwise, look into one of these interest-bearing account options to let your money grow and as a hedge against inflation (at least a little).

These savings accounts are FDIC insured and could earn you 11x your bank

Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 11x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.

Two of our top online savings account picks:

Rates as of May 17, 2024 Ratings Methodology
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SoFi Checking and Savings Barclays Online Savings
Member FDIC. Member FDIC.
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APY: up to 4.60%

APY: 4.35%

Min. to earn APY: $0

Min. to earn APY: $0

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