Top Reasons Why All of Your Money Should Be In Your Checking Account In 2021
A guide on where to keep your money this year
If you’re reading this and are aggravated by the title, good on you, but stay in your seat, it’s not what it seems like. If you read the title and felt like you could learn something, I have some good and bad news.
The bad news is that I will not be giving you a list of reasons to keep your total sum of money in your checking account because there are none! Everybody should have a checking account, but not everybody should have all of their money in one.
The good news is that you will learn where it should be instead. If this is the first time you’ve ever read that all of your money shouldn’t be in a checking account, keep reading and bookmark this for reference.
Money topics are hard, but let's face it — if you are old enough to remember what AOL Instant Messenger is, you’re old enough to know what other accounts exist as a storage place for your hard-earned money. I’ll keep this short and simple!
So if all of my money shouldn’t all be in my checking account, where should it be?
Any guesses? Keep in mind that I am not talking about what you should spend your money on, but rather where you should keep your money (and other assets). An account is just a parking spot for your money, or you can think of it as a container that holds your money (or other assets).
The answer is that where you store your money will depend on your money’s purpose.
Your money has multiple purposes. Just like your money is meant to be spent on different things, it is also meant to be stored in different places. I will be presenting to you three purposes that your money has. Firstly, some of your money is meant to be spent, secondly, some of your money is meant to be saved, and thirdly, some of it is meant to be invested.
I will be sharing with you more information for each purpose, and the best account for each purpose, and why.
1. Spending Money
What is spending money?
Spending money is the simplest of the three, and something we all know very well. Spending money includes your survival expenses and money for things you buy that bring you delight, but you don’t necessarily need to survive.
Survival Expenses
- Bills: Insurance, Utilities, Medical, Debt
- Groceries
- Gas
- Pet food
- Household
- Toiletries
- Etc.
Delight Money
- Take out
- Coffee
- Clothes
- Home decor
- Entertainment Subscriptions
- Etc.
The list can go on, but you get the idea. Some of these expenses can be fixed, meaning they are the same amount each month, and some of them can be variable, meaning they change in price (though they still occur regularly).
Where should your spending money be kept?
Any money that you will be accessing to spend for the month is safe to put in your checking account. Whether it’s a bank or a credit union.
In addition to keeping your spending money in a checking account, I also suggest keeping a buffer in your checking account, just in case you miscalculate how much you will need for fixed and variable expenses, or if something unexpected comes up. I like to think that anything in my checking account is fair to spend for the month, and if your buffer goes down, it should be filled back up.
TL;DR Your monthly expenses + a buffer of your choice should be in your checking account.
Why?
Since you need access to this money quickly, it needs to be easily accessible without penalty, and a checking account is basically just a wallet you can reach into to pay for your expenses.
2. Saving Money
What is savings money?
Saving money is designated for short-term savings goals that you need to access in the next days to 5 years. Some examples are below.
Short term goals
- Emergency fund
- Annual Bills: DMV license renewal, insurances, Costco membership, etc.
- Travel fund
- Christmas fund
- Downpayment
- Etc,
Where should your savings money be kept?
All of your savings money should not hang out in a checking account. Instead, it should be parked/stored in a high-interest account that is FDIC insured, is exposed to no risk, and is liquid (easily convertible to cash with no penalty)
High-interest accounts:
- High Yield Savings Account (HYSA) — my fave
- CD
- Money market account (not fund)
Note: Some people do like to use their short term savings to hack banking account sign up bonuses, but if you prefer to keep it simple and not have too many accounts opened at once and not chase $200-$300 bonuses (maybe more depending on the amount you have), then keep it simple and chose a high-interest account.
Why?
By putting your savings money in a high-interest account it is still accessible without penalty. Additionally, at best, you can keep up with inflation, and at worst, you can earn 16xs+ what most bank checking accounts could give you (even when rates are low).
Inflation causes the prices of goods to go up each year. So imagine you are saving money for an item that you want to buy in 2 years and you set aside your savings money in your checking account or under your mattress, the cost of that item will go up, and you will no longer be able to afford it at the price from two years ago once you reach your goal.
3. Investing Money
What is investing money?
Investing money is money that you don’t need in the short term (in the next 5 years) and that you can expose to risk. You can invest your money for long-term goals. Some long term savings goals examples are below:
Long-term savings goals
- Retirement
- Children’s college
- Etc.
Where should your investing money be kept?
The short answer is that you should keep your investment money in one of the accounts below. Keep in mind this is not what you should spend your investing money on, just where you should keep your investments.
- Tax advantage accounts like 401k/403B, HSA, Roth IRAs, 529
- Taxable brokerage account
These are solely accounts (remember, like a parking spot or container that is able to hold assets) like your checking account, except you are able to store things aside from cash in them, and depending on which you open, you can be protected from taxes.
The long answer is to put them in these accounts, but in this order:
- 401k/403b up to contribution match
- Max out HSA
- Max out Roth IRA (if you’re eligible)
- Max out 401k /403b
- A regular taxable brokerage account
Why?
By investing your money, the value of your assets that you have stored in these accounts will go up, so you will be able to reach your long-term goals, which tend to be in the 10’s/100’s of thousands of dollars if not millions. Compound interest will help you reach your goals much faster and the end sum will be more than the money contributed on your own.
By following the order above, you are able to keep the most amount of growth by getting free money from your employer and shielding your growth from taxes.