Your Checking Account Is the Worst Place for Your Extra Money. Here's Why

Your checking account is most likely where your paycheck is deposited, and it's a good place to keep money that you'll use to pay bills and to spend on routine expenses.

Your checking account most likely offers bill payment services, and chances are good you can also access the funds in it using an ATM or debit card, making your cash easily accessible. That's great if you're using it to pay your rent or credit card bills or to buy groceries.

What you don't want to do, though, is keep extra money in a checking account. Here are a few big reasons why you should make a different financial move.

It will be too easy to spend the extra money without thinking

One of the biggest reasons why you don't want to keep extra money right there in your checking account is because it is so accessible and it's not earmarked for any purpose. What will most likely end up happening is that you'll use it for various things without really paying attention to where it's going or whether you're getting value from it.

In an Intuit survey, 3 in 5 Americans indicated they had no idea what they had spent their money on the prior month. If there's money just sitting in your checking account, there's a very real chance you'll end up being one of those people and just using the money for random lunches out or splurge purchases at the store or whatever other things come up.

If, on the other hand, you put the extra money -- the cash beyond what you'll need to cover upcoming bills -- into a savings account or a certificate of deposit (CD) instead, then you wouldn't be able to spend it so effortlessly without thinking about it. You'd have to go to extra effort to withdraw it from savings or might have to pay a penalty for withdrawing funds from a CD account before the term is up. So you'd be a lot less likely to buy things you don't really need just because you feel as if you have the extra cash to spend.

You won't earn a very good return

Another big issue with keeping extra money in checking is that the money isn't going to work very hard for you.

Many checking accounts do not pay any interest, and those that do typically pay very, very little. The FDIC reported that the average interest rate on a checking account is .07%. At that rate, you are basically earning almost nothing, since it's such a small sum and it's unlikely it will even allow you to keep pace with inflation.

By contrast, you could often get much better returns if you invested in a high-yield savings account or, if you didn't need the money for a long time, if you invested in index funds tracking the performance of the stock market.

The table below shows the difference in your potential return on investment (ROI) over the course of a year if you had an extra $2,000 and were trying to decide whether to keep it in checking or do something else with it. It's based on typical rates you might find on these different financial products as of mid-January 2023.

Why would you want your extra money just sitting in checking when you could move it elsewhere where it could actually do something useful for you?

Ultimately, if you want to get the best use out of money you don't need for immediate expenses, you should put it into a savings account if you'll need it in the next couple years, or a brokerage account if you won't need it for a while. It can earn better returns and you'll be less likely to waste it, so it's a win win.