May 7, 2020

6 reasons I keep most of my cash in a savings account instead of in checking

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A checking account should be a stop for your money on its way to somewhere else, not a final destination.
Putting money aside for a major purchase, like a house or car, in a high-yield savings account means you earn interest on your large balance, helping it grow even faster.
Separating your money into savings accounts can help you to avoid accidental or easy spending and to save for financial goals.
Find out who has the best high-yield savings account right now »

If you are paid with direct deposit or by check, the destination for your regularly scheduled income is likely a checking account. Checking accounts act as a financial clearinghouse where money goes in and out of your life. However, checking isn’t the only type of bank account you should have.

A savings account is often the first bank account many of us have as kids. As adults, savings accounts offer several benefits, including higher interest rates, a buffer between your spending money and other funds, and help with managing your cash flow.

Here’s a look at six reasons you should keep money in a savings account instead of in checking.

1. Earn a higher interest rate

Many checking accounts don’t offer any interest at all for your deposits. Of those that do, the majority offer pretty low rates. For example, I love my Schwab Bank checking account, but it typically pays about 0.02% to 0.04% interest. It’s better than nothing, but not by much.

I keep about a month’s worth of expenses in my checking account and put the rest of my cash in savings — it’s a strategy I swear by as a former bank manager and corporate finance/accounting professional. Most of it sits in high-yield savings accounts at Ally Bank, Capital One, Simple, and SoFi, where it earns up to 20 times as much as it would in my checking account.

2. Fewer fees and minimum balance requirements

The best checking accounts in the US are free, with no minimum balance and no recurring fees. Not all banks follow those guidelines, however.

And for checking accounts, the rules can be stringent. To qualify for free checking, you may have to keep a certain balance, use your debit card a minimum number of times per month, or jump through other hoops.

Savings accounts are made to just keep your money safe while it slowly grows with interest. While Federal Reserve regulations limit savings accounts to six withdrawals per month, you should otherwise find it easier to avoid fees with a savings account.

Some banks have minimum-balance rules to avoid a fee. If that’s the case, you should consider switching to a bank that won’t charge you to keep your money there.

3. Avoid the temptation to spend

Spending money from a checking account is second nature to many people. While many savvy spenders use a credit card and pay off the balance from their checking account, other people use a debit card and an ATM to quickly and easily withdraw from checking.

If the money is in savings, however, it isn’t as easy to spend, and it takes away some of the temptations of frivolous purchases.

I consider my savings accounts walled off from my checking and daily spending needs. Most of my cash is in an emergency fund. I save for property taxes and insurance in a dedicated high-yield savings account. I keep a little cash in other savings accounts for months when big bills come in or for other short-term financial goals.

4. Keep your emergency fund safe

An emergency fund is one of the most important uses of a high-yield savings account.

According to data from the Federal Reserve, about 40% of Americans wouldn’t be able to afford a $400 emergency with cash; 27% would have to borrow or sell something to come up with the money, and 12% said they couldn’t cover it at all.

Medical bills, home repairs, and broken-down cars often cost well over $400, so that’s just a baseline for comparison.

Most experts suggest saving at least three months’ worth of expenses in an emergency fund. For people who are self-employed or don’t have a stable income, it’s wise to double that, to six months’ worth of expenses in savings where you can’t easily touch it.

5. Steadily save for a major goal

If you want to buy a home or car or make any other major purchase, it’s a good idea to save up for it first. Where should you save so you don’t accidentally spend the money on something else? A high-yield savings account, of course!

I pay $13,000 in property taxes and homeowner’s insurance every year. I put away $250 per week in a savings account to cover those bills and avoid spending that money on something else. The same strategy works for saving for a wedding, a down payment on a car or home, or anything else.

6. Save more and save often

A common regret among Americans in a wide range of age groups is that they didn’t save enough when they were younger. I’ve never come across someone who regretted saving as much as they did. It’s almost always better to save more if you’re able.

Getting on a regular savings schedule is the best way to avoid spending your money in the wrong place. If you can set up automatic transfers from your checking account or split your direct deposit into multiple accounts, you’re able to save every month without even thinking about it.

Whatever you do, don’t avoid or neglect your savings or keep too much money in a checking account. If you can automatically save every payday in a high-yield savings account, you’re making a great decision for your long-term financial future.

By Eric Rosenberg – former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online personal finance side hustle full-time.

Buck Bully