A recent GOBankingRates survey shows that nine out of 10 people have checking accounts. But despite the familiarity, the question of exactly how much to have in one remains a personal finance mystery for many.
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“I’ve had a lot of clients ask how much cash they should keep liquid versus how much they should invest in the markets to get a better return,” says Charles Claver, senior vice president and director of investment management and trust for First Bank. Claver says the right amount is “typically very personal depending on the client and his or her financial situation.”
That’s undoubtedly true, but once you hit $5,000, it’s possible that at least some of the money in your checking account can work harder for you elsewhere. Here are six options to consider.
If your monthly expenses are around $5,000, then do nothing
Start by asking what $5,000 means to you in terms of monthly expenses. “The daily check is for your bills and expenses,” Claver said. “Basically the funds that come in and out frequently.”
Northwestern Mutual recommends keeping one month’s take-home pay in your checking account to give yourself a 30-day cushion. Excess money languishing in control may serve you better elsewhere, but cutting it too close is dangerous.
Account activity is frequent and consistent — subscriptions and other recurring payments, cash withdrawals, direct deposits, BNPL transactions, etc. So if your monthly spend is around $5,000 and that’s what you have to check, stick with it. But if you spend less or have more, congratulations—you’ve outgrown your checking account by living within your means.
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Buy financial security by funding a savings account
The GOBankingRates survey found that about 50% of the population has no emergency savings. If you have money left over for checking, wave goodbye to the half that is living check to checking and join the half that isn’t by moving the deductible to a federally insured savings account – the highest returns are currently over 4%.
“These are funds that are for short-term emergencies and preparedness,” Claver said.
Your instinct may be to pay off debt first, but without at least a modest emergency fund, the broken window or dead generator that’s always just around the corner will send you back to your credit cards before you’re even done. pay them.
Now is the time to deal with debt – maybe
You were right to prioritize debt, but according to Fidelity, eliminating it is second only to an emergency fund if you’re paying at least 6% interest.
Most loans cost more than that today, but if you locked in a lower rate when money was still cheap, keep kicking that can down the road. Instead, your checking balance would be more useful in a brokerage account.
Congratulations, you are about to become an investor
The reason for the 6% rule is that sound investments can earn at least that much over time, meaning your gains can exceed the interest you pay on your debt.
“Long-term funds should be invested in a balanced, diversified portfolio for long-term appreciation,” Claver said.
Always go for an employer’s 401(k) match first, but if that’s not an option, open a free brokerage account that allows fractional stock trading so you can start small with what you have and get each dollar to count.
Upgrade to new capabilities
The balanced, diversified portfolio that Claver envisions will look different for everyone. Most experts advise beginners to use dollar cost averaging to buy fractional shares of an index ETF consistently over time and stick with it for the long haul.
It’s timeless advice, but even if your initial investments (hopefully) appreciate, learn as much as you can about how to diversify your holdings when your checking account starts bulging again, including:
Real estate, including physical properties, REITS and crowdfunding
Bonds and other debt instruments
Tangible assets such as art and wine
Cryptocurrency and other digital assets
Income-generating investments such as annuities
Spread the wealth to new accounts
Now that you’ve expanded your holdings beyond checking to include a savings and brokerage account, consider how you can get even more out of your money by stashing some cash in tax-advantaged accounts with special privileges. Roth IRAs are one of the most versatile options.
Unlike traditional IRAs and 401(k)s, you fund Roth IRAs with after-tax income. Since the IRS already took its bite, you can make tax-free withdrawals later — any gains you make over time are also tax-free. You can contribute until any age, there are no required minimum distributions, and your heirs don’t have to pay taxes on Roth IRAs you leave as an inheritance.
Also consider a health savings account (HSA), which lets people with qualified high-deductible insurance plans save money with a unique triple tax benefit. Your money goes tax-free into an HSA, gains on your investments are tax-free, and you can make withdrawals for qualified medical expenses—both now and in retirement—without ever giving a dime to the IRS.
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This article originally appeared on GOBankingRates.com: 6 Things to Do If You Have More than $5,000 in Your Checking Account