How a Large Checking Account Balance is Keeping You Poor
Over the years, we have encountered individuals with $10,000, $100,000, and even $500,000 sitting in their checking accounts. This usually happens when someone accumulates money quickly without thinking about what to do with it. Sudden accumulations of money may be from an inheritance, war zone pay for government employees, settling a lawsuit, or something else entirely. Receiving a windfall is terrific, but not knowing how to maximize that windfall can hurt your finances in the long run.
Going from having no-to-little money to having six-figures can be overwhelming. Many individuals have a tendency to deal with overwhelming scenarios by doing absolutely nothing. Unfortunately when it comes to your finances, receiving a large sum of money and doing nothing while it sits in your checking account is pretty much the worst thing you can do.
What is Worse
Okay, leaving a huge sum of money in your checking account is not the worst possible scenario. Spending it all on luxury goods you do not need with operational costs that exceed the large sum of money you originally received is worse. A surprising number of lottery winners end up spending all their money quickly and even going into debt. That is worse than leaving a ton of money in your checking account.
Leaving a large amount of money in your checking account has two positives. First, you have a buffer to prevent you from ever overdrawing on your checking account. Buffers are great, but $500,000 buffers are a bit extreme. Most of us do not accidentally buy a home, Ferrari, or boat, so we can probably have a bit less money in a checking account.
The second positive is that you have money. Having money is better than not having money. However, you are storing that money in the least productive way possible. Money left in a checking account is essentially cash. It cannot keep up with inflation, meaning it actually loses value over time. Plus, it does not even have the upside that cash does: You cannot access it if electronic systems go down and you suddenly need cash for an emergency.
The Simple Better Option: High-Yield Savings Account
The easy, no-thoughts-necessary solution to having too much money in a checking account is to move the money to a high-yield savings account (HYSA). This requires no thinking about your future goals for the money and no knowledge of investing generally. HYSAs are safe accounts that provide you interest for keeping your money in them. For storing your money in a HYSA, you currently get somewhere between 3–4% interest. This interest means your money keeps up with inflation rather than gradually devaluing over time like cash does. Your money can sit in a HYSA for a decade, and it will still have the same purchasing power that it does today even if you never add another dollar to it.
HYSAs are immediately accessible, so you can withdraw money from them quickly. Some HYSAs limit the number of monthly transactions, but it is usually at least ten per month, making it easy to stay within the limit. In other words, if you suddenly need the six-figures you deposited in a HYSA, you can get it out to use it. This is why HYSAs are often used for savings goals like buying a home. You can save the money, earn a little interest, and remove large sums quickly.
If you have a large amount of money in your checking account, there is no downside to moving it to a HYSA. The move from a checking account to a HYSA is for those who do not want to think about their money or financial goals at all but want to have the same purchasing power next year. Make the move if you are in this situation.
Think About Your Financial Goals
Ideally, you should think beyond the quick move from a checking account to a HYSA and actually consider what to do with your money. Accumulating money without ever contemplating why you are accumulating is a practice that can leave you poor and unprepared for your future financial situation. When we have a large sum in our checking account, we feel like we have control over our finances because we have a giant safety net. But it is artificial. Only saving money without investing is not enough to build wealth or even retire at 65 years old. Without setting intentional goals for yourself, you will find yourself short of the wealth you need even if you remain stress-free during your working years.
If you have serious money in a checking account, consider investing some of it. The younger you are, the bigger difference this will make. The more you can invest rather than keep in HYSA in case of emergency or shorter-term spending, the better. Invest to build wealth. Build wealth to build the life you want.
Investing is not as scary as it sounds. We have written extensively on how investing in index funds or target retirement date funds make investing easy. Many individuals believe investing means studying every company in the stock market to try to pick stocks that will see the most growth over time. In reality, the best financial advisors in the world do not consistently outperform the total stock market. Over time, you are better off investing in index funds than trying to pick a winner.
Once you invest in index funds or a target retirement date fund, you can go back to forgetting about your money. For decades. It will grow to prepare you for your future without you doing anything else.
If you leave $100,000 in a checking account for the next 25 years, you will have $100,000 in 25 years. That $100,000 will buy you far less than it would today. If you invest $100,000 in an index fund tied to the S&P 500, you will have $1,000,000 in 25 years assuming the S&P 500 maintains its average annual returns between 10–10.5% over that period. You 10x your money, allowing you to not only keep up with inflation but actually grow wealth that can provide an entirely different future than $100,000 can.
Large checking accounts can feel like a financial safety net. This is a false sense of security. Having large sums in a checking account keeps you poor because that money should be growing to build wealth. Move that money to at least keep up with inflation, and eventually move it to pursue your future financial goals. Build a financial future, not a large checking account.
Comments