A recent GOBankingRates survey revealed that a staggering 90% of individuals have checking accounts. Amid this abundance, the perplexing conundrum of how much money to retain in these accounts persists, haunting many in the realm of personal finance.
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Charles Claver, the senior vice president and director of investment management and trust at First Bank, disclosed, “I’ve had many clients ask about how much cash they should keep liquid vs. how much they should invest in the markets for a better rate of return. The right amount is typically very personal depending on the client and his or her financial situation.”
It’s undoubtedly a personalized conundrum. Nonetheless, once your checking account balance exceeds $5,000, it’s conceivable that at least a fraction of those funds can be channeled into more productive ventures. Here are six options worth considering.
Assess Your Monthly Expenses to Determine the Next Step
Firstly, ponder the significance of having $5,000 in the context of your monthly outlay. Charles Claver emphasized, “Everyday checking is for your bills and expenses — basically, the funds that are frequently coming in and out.”
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Northwestern Mutual recommends maintaining approximately a month’s worth of take-home pay in your checking account to afford a 30-day cushion. While excess funds idling in checking accounts could find more purposeful utilization elsewhere, trimming it too close could court peril.
Given the regular and predictable activity in checking accounts — encompassing subscriptions, recurring payments, cash withdrawals, direct deposits, and BNPL transactions — if your monthly expenditure approximates $5,000 and your checking balance mirrors this, holding steady is advisable. Yet, if your outlay is less or your balance more, congratulations are in order — you’ve outstripped the confines of your checking account by living within your means.
Enhance Your Financial Security by Funding a Savings Account
The GOBankingRates survey exposed that approximately 50% of the populace lacks an emergency savings fund. If excess funds are lingering in your checking account, bid adieu to the half teetering paycheck to paycheck and join the ranks of those who are prepared by transferring the surplus to a federally insured savings account — currently offering yields in excess of 4%.
Charles Claver advises, “These are funds that are for short-term emergencies and contingency.” Although your instinct may nudge you to first vanquish debt, without a modest emergency fund, the shattered windshield or ailing alternator, perennially looming in the shadows, could propel you back to your credit cards before you’ve even settled your existing debts.
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Address Your Debt: Perhaps Now, Perhaps Later
Prioritizing debt is indeed prudent, but according to Fidelity, eradicating debt follows building an emergency fund, unless the interest rate exceeds 6%.
Most contemporary loans attract a higher interest rate, yet if you secured a lower rate during the era of cheap credit, deferring debt repayment may be expedient. Instead, channeling your checking surplus into a brokerage account seems more advantageous.
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The 6% rule is warranted due to the potential of sound investments to yield at least that over time, thus outpacing the interest accrued on your debts.
Charles Claver urges, “Long-term funds should be invested in a balanced, diversified portfolio for long-term appreciation.” It’s always prudent to seize an employer’s 401(k) match initially. If that avenue is unavailable, commence with a no-fee brokerage account enabling fractional-share trading to initiate a modest but impactful investment journey.
Advance to Fresh Opportunities
Realizing Charles Claver’s vision of a balanced, diversified portfolio is a personalized endeavor. While experts advocate dollar-cost averaging for purchasing partial shares of an index ETF consistently over time and adhering to this path for the long haul, it’s also judicious to delve deeper into diversifying your holdings as your checking account burgeons once more. Encroaching into avenues such as:
- Real estate, including physical properties, REITS, and crowdfunding
- Precious metals
- P2P lending
- Bonds and other debt instruments
- Tangible assets like art and wine
- Cryptocurrency and other digital assets
- Income-generating investments like annuities
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Diversify Your Assets Across New Accounts
Expanding your asset repertoire beyond checking to encompass a savings and brokerage account is an exceptional start. The subsequent step involves exploring opportunities to amplify your wealth by stowing away cash in tax-advantaged accounts endowed with special privileges. Roth IRAs emerge as one of the most versatile options.
Unlike traditional IRAs and 401(k)s, Roth IRAs are nourished with post-tax income. Given that the IRS has already taken its share, you can make tax-free withdrawals subsequently. Any gains accrued over time are also exempt from taxation. Contributions can continue unabated at any age, devoid of any obligatory minimum distributions, and any Roth IRAs bequeathed to your heirs remain untaxed.
Additionally, contemplate embracing a health savings account (HSA), a haven for individuals with eligible high-deductible insurance plans, offering a unique triple tax advantage. Funds enter the HSA untaxed, investment gains are insulated from taxes, and withdrawals for qualified medical expenses, both in the present and during retirement, incur no tax liabilities to the IRS.
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This article originally appeared on GOBankingRates.com: 6 Things To Do Now If You Have More Than $5,000 in Your Checking Account
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
