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Money Leaks: Too Much Cash in Checking Accounts

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How much money do you currently have sitting in you checking account? Is it too little? Or is it too much? If you’re fortunate enough to be in the second camp, this week’s money leak is for you. If you aren’t one to be diligent about saving each month and simply let your checking account accumulate, you could be leaving too much cash in your checking account when it could be better off stored elsewhere.

This could be a problem because you’re leaving a little (especially these days!) cash on the table in terms of interest. The vast majority of checking accounts don’t pay interest so when you keep too much in there, it’s money that could be earning a little bit more in a savings account.

There are two solutions to this dilemma:

  • Open an interest bearing checking account, or,
  • Optimize your checking account balance.

This is the latest edition of our new series called Money Leaks.

Interest Bearing Checking Account

Your best option for this is an online bank account because you get the best of both worlds – access to your funds at ATMs and a higher than average interest rate. The interest rates won’t be phenomenal, ING Direct currently yields 0.25% on balances under $50,000, but they’ll be better than zero.

Another benefit of an online checking account is that the bank will typically have a savings account with a higher yield. You’ll be able to transfer between those accounts instantly, which makes optimizing your interest rate much easier. ING Direct’s checking may only yield 0.25% but the savings account is a healthier 1.00% APY.

Optimizing Your Balance

If you don’t want to open another account just for a little more interest, consider optimizing your balance. There are a lot of reasons why budgeting is important but it’s especially crucial when talking about minimizing your checking account balance. When you budget, you know how much money you need to keep in your checking account and can put the rest into savings.

I prefer the first method, of using an interest bearing checking account, over the second method, optimizing, because mistakes don’t end up costing you money. If you are tweaking your balance and overdraft, you’ll be hit with an insufficient funds fee. If you use an interest bearing checking account, there isn’t an opportunity to make that mistake.

In the end, this is a small money leak, especially with these interest rates, but one that might be worth a look.

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13 Responses to “Money Leaks: Too Much Cash in Checking Accounts”

  1. NateUVM says:

    How would you fit Reward Checking accounts into this analysis?

    I figure they probably fit under the Interest Checking tag, but you mentioned ING’s 0.25% return and most Reward Checking accounts offer more than that, so I figured it was worth mentioning/asking….

    • govenar says:

      I treat my reward checking account like a savings account; I want to leave the maximum amount of money in it earning the higher interest, so I don’t actually make payments out of it (except for the required debit card transactions). Though if your total amount of cash is less than the max for the reward checking account (or you have multiple RCAs, but then the required transactions can be too much of a hassle), you could treat the RCA as your main checking account.

  2. STRONGside says:

    I know that there are also high interest savings accounts, that pay upwards of 4%. Honestly cant remember which blog I read that on (might have been this one…) but I checked them out, and they look legit. Any opinions on any of these?

  3. ImpulseSave says:

    Too much money in checking is something I always forget about but you are so right it can be such a pitfall. For one, it seems to disappear so much faster when I forget to slide some over to savings and secondly the number of impulse-purchases definitely goes up. I think my take away from this post is whatever you do with your money: be intentional! Thanks for posting!

  4. Scott says:

    Is my balance optimized? I haven’t been hit with an overdraft fee, so it isn’t too little. I don’t think it’s too much as I’m able to balance my anxiety of getting hit with a fee against my anger at giving the bank a large interest free loan; I roughly keep the minimum around $1000.
    With online banking, ACH transfers and some management skills, people can open up a Vanguard brokerage account, link it to the checking account, transfer excess money in, and buy BND, VCIT or some other bond fund. Costs are either low or none, and the yields beat the heck out of these interest bearing checking and savings accounts.

  5. I try to never leave more than about $1,000 in checking, but of course that fluctuates upwards throughout the month depending upon what bills are next in line to get paid. The excess I transfer to online savings accounts, retirement funds, and other investments. I don’t let myself get too caught up in rate chasing for much of anything these days since the returns are so paltry. It’s just not worth the time and effort.

  6. Julie says:

    I hate earning interest on checking/savings account and give some of it back as income earned to Uncle Sam. If I earn $300.00 a year on interest income with my 1099, it seems that Uncle Sam want most of my $300.00. Hence is one reason I have a non interest checking accountas well as a interest savings account.

    • NateUVM says:

      No one pays 100% of their earnings in taxes. So, you’d be getting SOMEthing back for having interest checking. Not sure why you feel so strongly about where some (again, not all) of it goes if the alternative is to make nothing…?

      Also, all you’re doing is giving the bank an interest-free loan for the amount of your balance. Say what you will about the Feds, etc… But how are banks any better?

  7. Eddi says:

    Even with “high interest” checking, I overkill checking enough to feel a little regret every year at tax time, seeing how little I made on it….the security the rest of the year is worth it though!

    Navy Federal Credit Union is currently giving about .5% on my checking…wow, when did they pass ING?Weird times?

  8. Shirley says:

    My budget spreadsheet gets filled out at the end of every month and it includes a row that shows income minus outgo.

    The following row shows 80% of that positive figure and that is the amount that will go into savings. I find this to be a great monthly reminder!

  9. skylog says:

    this is something i have been doing for some time. i try to keep only what is needed in my checking account. i look at my obligations for the week/month and try to act accordingly. i put all i can into my investment accounts and savings account. if something comes up, i keep a few hundred in cash in my ING checking account that i use only for this purpose.

  10. You might want to consider stashing your cash into a “rewards checking account.” you’ll get an APY of between 2-4%, which blows away any interest you’ll find on a money market account right now. The only catch is youll have to make 10 debit card transactions with the account each month and set up a recurring direct deposit. Still not too difficult imo if it’s your primary checking account…


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