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  • Rafael Ulloa

Avoiding "Dead" Money

Do you have good reasoning behind how much money you keep in your checking account?

Experts say there are downsides to keeping too little or too much money in a checking account. Overdraft fees are the worst, but Americans with too MUCH money in a low-yield savings account could be losing significant interest. Federal Reserve interest rates have risen to their highest levels since 2008, which means individuals see greater gains in their savings - But ONLY they invest their dollars wisely.

How to split funds between your checking and savings accounts.

The main purpose of checking accounts is to store funds for everyday purchases and money for monthly bills. Avoid overdrafts by adding a buffer to your checking account. Use the account only for those day-to-day transactions and keep enough in it to avoid fees. We would recommend storing enough cash to cover two months' expenses and then adding a 30% buffer on top of that.

A shocking number of Americans do not have any retirement savings. Furthermore, Americans are piling up credit card debt due to inflation. In an environment where money is constantly deposited and withdrawn, it’s possible to run out of money. That means some hefty fees. But that doesn’t mean you want to keep every penny in checking. Account owners with too lean accounts risk overdrawing and incurring hefty fees.

Is your money “Dead”?

Don't let your checking account grow too large. That’s because this type of account doesn't usually pay interest to cardholders. If you leave too much money in your checking account, you can consider the excess to be “dead” meaning it is making no interest. After calculating two months' worth of expenses plus a buffer, you should add two-to-four months' worth of expenses into a high-interest savings account.

In contrast to bigger banks, smaller online institutions are currently advertising interest rates as high as 3.91%. A $10,000 savings account would earn almost $400 a year at that rate. With some of the highest deposit rates in recent years, it’s worth your while to change to a credit union or smaller institution. If you already have a savings account, compare its annual percentage yield with those of other banks since they can differ greatly.

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