A recent GOBankingRates survey shows that nine out of 10 people have checking accounts. But despite the familiarity, the question of how much, exactly, to keep in yourself remains a personal finance mystery to many.
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“I’ve had many clients ask me how much money they should keep liquid versus how much they should invest in the markets for a better rate of return,” said Charles Claver, Senior Vice President and Director of Investment and Trust Management for First Bank. Claver says the right amount is “usually very personal depending on the client and their 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, do nothing
Start by asking yourself what $5,000 means to you in the context of your monthly expenses. “Daily checking is about your bills and expenses,” Claver said. “Basically funds that come in and go out frequently.”
Northwestern Mutual recommends keeping about one month’s net pay in your checking account to give you a 30-day cushion. Excess money languishing in checks may serve you better elsewhere, but cutting it too close is dangerous.
Checking of account activity is frequent and constant – subscriptions and other recurring payments, cash withdrawals, direct deposits, BNPL transactions, etc. So if your monthly expenses are around $5,000 and that’s what you’re checking out, stay put. But if you’re spending less or having more, congratulations, you’ve exceeded your checking account by living within your means.
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Buy financial security by funding a savings account
The GOBankingRates survey showed that around 50% of the population has no emergency savings. If you have money to spend on checking, say goodbye to the half that lives by check to check and join the half that doesn’t by transferring the excess to a federally insured savings account – the highest yields are currently over 4%.
“These are funds for emergencies and short-term contingencies,” Claver said.
Your instinct might be to pay off the debt first, but without at least a modest emergency fund, that broken window or dead alternator that’s still around the corner will send you straight back to your credit cards before you even have finished repaying them.
Now is the time to deal with the 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 the road. Instead, your checking surplus would be more useful in a brokerage account.
Congratulations, you are about to become an investor
The reason for the 6% rule is that smart investments can pay off at least that much over time, which means your earnings can exceed the interest you pay on your debt.
“Long-term funds should be invested in a balanced and 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 no-fee brokerage account that allows fractional stock trading so you can start small with everything what you have and that every dollar counts.
Graduate to new opportunities
The balanced and diversified portfolio Claver envisions will be different for everyone. Most experts advise beginners to use cost averaging to buy partial shares of an index ETF consistently over time and stick with it for the long term.
It’s timeless advice, but while your seed investments are (hopefully) appreciating, learn as much as you can about how to diversify your holdings when your checking account starts to swell again, including:
Real estate, including physical properties, REITs and crowdfunding
Bonds and other debt securities
Tangible assets like art and wine
Cryptocurrency and other digital assets
Income-generating investments like annuities
Distribute wealth to new accounts
Now that you’ve expanded your holdings beyond checking to include a savings and brokerage account, think about how you could get even more out of your money by putting money into tax-advantaged accounts with special privileges. Roth IRAs are one of the most versatile options.
Unlike traditional IRAs and 401(k), you fund Roth IRAs with after-tax income. Since the IRS has already taken its bite, you can make tax-free withdrawals later – any gains you earn over time are also tax-free. You can contribute up to any age, there are no required minimum distributions, and your heirs don’t have to pay taxes on the Roth IRAs you inherit.
Also consider a Health Savings Account (HSA), which allows people with eligible high-deductible insurance plans to save money with a unique triple tax benefit. Your money goes into an untaxed HSA, gains on your investments aren’t taxed, and you can make withdrawals for qualified medical expenses — 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 you should do if you have more than $5,000 in your checking account