You don't often read articles about why having too much money in your bank account is problematic. But if you're using your checking account to stash a lot of your cash, that's a problem.
The idea of having too much money in your checking account might seem counterintuitive. While having a healthy savings cushion is essential, thanks to inflation, maintaining an excessively high balance in your checking account might not be the most efficient use of your funds.
In this article, we will explore the reasons why having more than $10,000 in your checking account is too much and discuss alternative strategies for optimizing your financial resources.
Why Having More Than $10,000 on Your Checking Account Is Too Much
One primary reason to avoid keeping a high balance in your checking account is opportunity cost.
Money sitting idly in your checking account is money that could potentially be earning more elsewhere. Instead of accumulating large sums in a low-interest checking account, consider allocating excess funds to investments or high-yield savings accounts to maximize your returns over time.
In fact, a savings account is a great place to keep your emergency fund. Your emergency fund is money set aside to be used for an unexpected expense. For instance, car repairs can be pricey. Or, an unexpected job loss can result in quite a financial strain.
Remember, never invest your emergency fund.
Inflation and Purchasing Power
Inflation erodes the purchasing power of money over time, and this is especially true if your money isn't generating income.
If your checking account balance consistently exceeds your immediate needs, the real value of that money may decrease due to inflation. To counteract this, it's advisable to reassess your financial goals and allocate excess funds to investments that have the potential to outpace inflation.
For instance, the S&P 500 has historically returned an average of over 10% since its inception in 1957, which will help your money outpace inflation during most years. Thus, investing your money in appreciating assets like stocks or bonds is a great way to put your money to work rather than letting it sit in a checking account, losing value year after year.
Emergency Fund Optimization
While having an emergency fund is crucial, maintaining an excessively high balance in your checking account might not be the most efficient way to secure your financial future. In other words, don't use your checking account as your emergency fund.
Why? Because money in your checking account is too easy to spend accidentally. Don't tempt yourself. Your emergency fund should only be used in emergencies, so keep it easily available but separate.
Evaluate your emergency fund needs and consider moving surplus funds to a separate savings account or investments that offer better returns.
Here's What To Do Instead
Establishing a Tiered Savings System
Create a tiered savings system where you allocate funds to different accounts based on their purpose and timeline.
Hint: This requires due diligence beforehand to determine your savings goals. For instance, funding your child's college education is a common financial goal for many adults. Or retiring by 45 is another good goal to strive for.
Consider having a separate emergency fund, short-term savings, and long-term investments. This approach allows you to optimize the returns on your money based on its intended use.
Explore investment opportunities that align with your risk tolerance and financial goals.
Whether it's stocks, bonds, or real estate, investing provides the potential for higher returns compared to a stagnant checking account. Diversifying your investments can help mitigate risks and optimize your overall financial portfolio.
High-Yield Savings Accounts
Consider opening a high-yield savings account that offers better interest rates than traditional checking accounts. These accounts balance liquidity and returns, allowing you to earn more on your savings without sacrificing accessibility. As I've said before, a high-yield savings account is a great place to stash your emergency fund.
In conclusion, while having a comfortable buffer in your checking account is important for managing day-to-day expenses, excessively high balances may not be the most strategic use of your funds.
By understanding the concept of opportunity cost, considering the impact of inflation, and optimizing your emergency fund strategy, you can find a balance that maximizes the potential of your financial resources. Explore alternative strategies such as tiered savings systems, wise investments, and high-yield savings accounts to ensure that your money works for you, helping you achieve both short-term financial security and long-term wealth-building goals.