Don’t Keep All Your Money in Checking: Here’s Why It’s Inefficient

It might seem convenient to keep all your money in one place, like your checking account. After all, it’s where your paycheck goes, and it’s what you use to pay bills and make everyday purchases. However, relying solely on a checking account for all your financial needs can be surprisingly inefficient, especially when it comes to growing your money and making the most of what you have.

Think of your checking account like a tool designed for a specific job: handling your day-to-day financial transactions. It’s fantastic for depositing checks, paying bills online, using your debit card at the store, or withdrawing cash from an ATM. These are all short-term, transactional activities. Checking accounts are built for ease of access and quick movement of money. This is why they typically offer very little, if any, interest on the money you keep in them.

Now, imagine you have a garden. Your checking account is like your watering can – essential for daily needs and keeping things running smoothly. But what if you kept all your garden supplies, including seeds, fertilizer, and even tools meant for long-term growth, just piled up in your watering can? It wouldn’t be very effective, would it? You need different containers and strategies for different gardening tasks.

Similarly, when it comes to your money, you need to think beyond just daily transactions. Keeping a large sum of money sitting in a checking account is like letting those seeds and fertilizer just sit in the watering can – they’re not actively growing or working for you.

The biggest inefficiency of solely using a checking account is the missed opportunity for your money to earn interest. Interest is essentially a small percentage that banks pay you for keeping your money with them. While checking accounts often offer minimal to no interest, other types of accounts, like savings accounts, and even investments, are specifically designed to help your money grow through interest or returns.

Let’s say you keep $5,000 in your checking account for a whole year. If your checking account offers 0% interest (which is common), that $5,000 will remain exactly $5,000 at the end of the year. It hasn’t grown at all. In fact, due to something called inflation – the general increase in prices of goods and services over time – that $5,000 might actually buy slightly less at the end of the year than it did at the beginning. Inflation is like a silent thief, slowly reducing the purchasing power of your money if it’s not growing at least as fast as inflation.

On the other hand, if you had kept that $5,000 in a high-yield savings account, even at a modest interest rate, you would have earned some extra money over the year, helping to combat inflation and slightly increasing your overall wealth. Savings accounts are designed to be a safe place to store money you don’t need for immediate spending, while still allowing it to earn interest. They offer a balance between accessibility and growth.

Think of it this way: your checking account is for spending money, while a savings account is for keeping money you plan to use later, or for building up an emergency fund. And beyond savings accounts, there are even more options like Certificates of Deposit (CDs) or investments, which can offer potentially higher returns over longer periods, although they may also come with different levels of risk.

In conclusion, while checking accounts are essential for managing your daily finances, they are not designed to be a place to store all your money long-term. Keeping a large amount of money solely in a checking account is inefficient because it misses out on the opportunity to earn interest, potentially losing purchasing power over time due to inflation, and neglecting to utilize different financial tools designed for savings and growth. A smarter approach is to use a checking account for its intended purpose – transactions – and explore other types of accounts to make your money work harder for you and achieve your financial goals.