Your checking account and your savings account should serve two different purposes. Your checking account should contain money for the purpose of paying ongoing bills, whether it’s your mortgage, your cable bill, or your tab at the supermarket.
Your savings account, meanwhile, is where you should be keeping money for unplanned expenses as well as near-term goals. If you’re trying to sock away a down payment to buy a home, for example, your savings account is the best place for that cash.
Perhaps you’re thinking of taking all of your money out of your checking account and putting it into your savings account. That way, you may be less tempted to touch it. But just as importantly, you’re apt to earn a much higher interest rate on money in a savings account than in a checking account.
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These days, in fact, a number of high-yield savings accounts are paying interest upward of 4%. Compare that to the 0% interest rate you might be getting in your checking account, and it’s easy to see why you wouldn’t want to keep a whole lot of cash there. But while moving all of your money from a checking account to a savings account might seem like a good bet, it’s a move that could actually backfire on you.
You need that cushion
Let’s say you typically earn enough money each month to cover your bills in full. You might assume it’s safe to empty out your checking account, since your incoming paychecks should be enough to satisfy your various obligations.
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But remember, you never know when an unplanned expense might arise. And so it’s a good idea to have a little extra cash in your checking account for those unanticipated expenses.
Now, you may be thinking, “Oh, well in that case, I’ll just transfer money from my savings account to my checking account, and it won’t be a problem.” And in some situations, that logic works.
Let’s say you have a checking account and a savings account at the same institution. You may have the option to transfer money back and forth between the two accounts instantly. So in that case, leaving your checking account empty isn’t necessarily the worst move.
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But if you don’t have both accounts at the same bank, it could take several days to transfer money from one account to the other. And in an emergency situation, you may not have several days. And so a better bet is to leave yourself a cushion in your checking account, whether it’s an extra $500, $1,000, or $2,000.
Also, you never know when you might write a check, forget about it, and have its recipient sit on it for weeks before cashing it. If you move all of your money out of your checking account, and then someone cashes a $300 check you wrote, you could run into a serious problem.
A $0 balance isn’t ideal
You definitely don’t have to keep thousands of dollars in a checking account. But it pays to keep a little extra beyond what you need to pay your bills. This especially holds true if you can’t move money from your savings account into your checking account in an instant.
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