Are You Keeping Too Much Money in Your Checking Account?

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Why Too Much Money in Your Checking Account Is a Bad Thing 

You may think keeping a lot of money in your checking account is a smart idea—and it’s definitely better than stashing your cash under the mattress. But keeping too much in your checking account can hold you back. Here’s why:

• You’re losing out on growth: Most checking accounts pay very little to no interest, which means your balance not only isn’t growing, but inflation is actually shrinking its value over time.
• It’s linked to your debit card: This gives you easy access to your money, providing little obstacle to the temptation to spend it, especially if you see a large balance in your account. You may be encouraged to spend more than you want or can afford.
• Some of that money might not be safe: Large balances aren’t protected by the Federal Deposit Insurance Corporation (FDIC) if the bank fails. The agency protects deposits up to $250,000 per depositor, per institution, per ownership category. If your balance is bigger than this, the excess funds are not covered.

How Much Money Should You Keep in Your Checking Account?

If a checking account is not the best place to store your cash, how much should it hold? The exact amount depends on your financial situation, monthly bills, and monthly deposits.

“Maintaining a floor at one month of average expenses would help to prevent overdrafts,” Roger Young, Thought Leadership Director at T. Rowe Price, stated in an email. “In calculating that average, you should consider expenses that are sporadic or paid on a longer cycle.”

Put simply, your account should hold enough to cover your monthly expenses as well as any additional expenses, such as car insurance, home insurance, and property taxes when they are due. Also, make sure you meet your checking account’s minimum balance requirement to avoid monthly fees.

Where Should You Keep Anything More Than That? 

If you have excess cash, the best thing to do is save or invest it in vehicles that let it grow. In addition to earning interest, you’re also diversifying your holdings and may get some tax benefits. Here are some suggestions.

High-Yield Savings Accounts or Money Market Accounts

Consider parking some of that cash in a savings account. You can get a great rate by opening a high-yield savings account or money market account at a bank, credit union, or online financial institution. The top savings accounts pay annual percentage rates (APYs) of up to 5.00%.

“Savings accounts can be used to keep those funds separate, yet easy to access when necessary,” Young said. “Now that interest rates have risen compared to early in the decade, there are savings accounts with reasonable yields to consider.”

Savings accounts are highly liquid vehicles, which means you can easily withdraw your funds when you need them, especially in an emergency. Money market accounts are similar, but they also let you write paper checks. Both also are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) for up to $250,000 per depositor, per insured bank or credit union for each account.

Certificates of Deposit (CDs)

Certificates of deposit (CDs) hold your money for a certain period in exchange for a fixed interest rate. Terms range from a few months to as long as 10 years.

What makes CDs different from savings accounts is that your money—along with your guaranteed interest rate—is locked in for the entire term. If you withdraw the money before that, you’ll pay an early withdrawal fee, which can be significant.

The upside is that you don’t have to worry about savings rates falling because your interest rate is fixed for months or years. A CD, therefore, is a great option if you know you won’t need the money earlier than the maturity date. Like savings accounts, these vehicles are insured by the FDIC or NCUA for up to $250,000 per vehicle, per depositor.

Keep in mind that yields for savings vehicles (like CDs and savings accounts) tend to follow changes the Federal Reserve makes to the federal funds rate. So, when the Fed raises that benchmark rate, the yields banks and credit unions offer for new CDs tend to rise, too. The reverse is true if Fed rates drop. If you lock in a rate for a CD before the Fed changes its rate, you’re guaranteed that rate for the entire term. The same rule doesn’t apply to savings accounts, though.

Retirement Accounts

Saving for retirement is the second most important thing after planning for emergencies. There are multiple options to consider:

• 401(k) or 403(b): If you have an employer-sponsored retirement plan, such as a 401(k) or a 403(b), take advantage of it early in your career so you can benefit from compound interest growth. You use pre-tax money to fund the account, and you can contribute as much as $23,500 in 2025, with a catch-up contribution of $7,500 if you are 50 or older. Even if you can’t meet your total contribution limits, try to contribute enough at least to max out your employer match.
• Traditional IRA: Whether you have access to an employer-sponsored plan or not, you can invest in your future by opening an individual retirement account (IRA). You can invest in a traditional IRA as long as you have earned income. The contribution limit for 2025 is $7,000, plus an additional $1,000 if you are 50 or older. As with a 401(k), your contributions are tax-deductible; you don’t pay taxes until you start making withdrawals.
• Roth IRA: You can also contribute to a Roth IRA. Your contribution limit is based on your modified adjusted gross income (MAGI). The full contribution limit is $7,000 plus an additional $1,000 if you are 50 and over (and if you contribute to both a Roth and a traditional IRA, your combined limit is $7,000 plus the $1,000 catch-up contribution if you qualify). Your eligibility to contribute to a Roth phases out completely if your MAGI reaches a certain threshold ($150,000 for an individual in 2025). Roth IRAs require after-tax contributions, but the earnings grow tax-free, and you don’t pay taxes when you use the money for qualified withdrawals.

Brokerage Accounts

If you’ve got your emergency fund filled and you’re maxing out tax-advantaged retirement accounts, you may want to open a brokerage account. A brokerage account is a non-tax-advantaged account that allows you to buy and sell different securities like stocks, bonds, exchange-traded funds (ETFs), and mutual funds. Brokerage accounts can help you save when you’ve maxed out your tax-advantaged options. You can choose from different brokerage types based on your needs:

• Full-service brokerages offer a range of services, including portfolio management, advice, and research. Keep in mind that this all comes at a cost; these firms charge higher fees and commissions.
• Discount brokerages have lower fees because they allow you to make trades online through a self-directed platform.
• Robo-advisors are digital platforms that give you automated financial planning and investment services using algorithms and little to no human input.

Bonds can be a great option if you don’t want to assume too much risk. They can be purchased in a brokerage account.

“If you want to stay fairly conservative, you might consider short-term or ultra-short-term bond funds,” Young said, adding that municipal bonds and bond funds may be a great option if you’re in a higher tax bracket. These investments can be exempt from federal taxes and from some state taxes.

The Bottom Line

Checking accounts can help you manage your daily financial transactions. But they aren’t meant for saving, whether that’s for a rainy day or the future. Savings accounts, investment vehicles, and retirement accounts can all help put your money to better use. These can give you the benefit of earning interest, and some offer you tax advantages. If you’re unsure of how to make your money work for you, consider speaking with a financial expert who can guide you in the right direction.