With interest rates on savings accounts low enough to be nearly negligible for the purpose of building wealth, you may be asking yourself, “Why shouldn’t I close the account and put my money to work in the market?” Here are some good reasons to hold off on closing your account and splitting your savings between your checking and brokerage accounts:
It’s easier to save for an emergency. You should always have funds available in case of an emergency. A common rule of thumb is to have the equivalent of three to six months of your regular expenses on hand. If you keep this money in a checking account, you might inadvertently use more of it than you expect, especially if you have auto-pay set up for your bills.
You’ve got a big purchase coming up in the near future. If you know you’ll need $5,000 for a new car soon or $20,000 for the down payment on a house sometime in the next year, you should keep your money where it will be “safe.” Stock prices can fall and markets can move lower — and you don’t want to be a few thousand dollars short when you need it.
You won’t spend what you don’t “see.” It’s a good idea to separate your savings from your disposable income. If you see a large balance in your checking account each month after you’ve taken care of your important budget items, you may be more likely to splurge. On the other hand, if you regularly move money into savings so that the remainder of your checking account matches what you budgeted for your monthly expenses, you’ll be less likely to overspend.
Interest rates could head back up any time. Speculation that the Federal Open Market Committee will hike rates has been rampant quarter after quarter, with no change. Rates have been low for a long time, but they may not be this low forever.
Savings accounts provide an extra layer of security. Do you use a debit card to access the funds in your checking account? If you accidentally drop the card somewhere, an unscrupulous stranger could go on a spending spree until you notice and cancel the card. Card numbers are compromised in internet security breaches almost every month. Should someone else get access to your data through either of these situations, they’ll have to do some extra work in order to get to funds in your savings account.
However, for the same reasons that you move excess cash from your checking account into your savings account, you may want to move funds from your savings into wise investments. This is especially true if the amount of your savings is significantly greater than the sum of your emergency fund, or any large- to medium-term expenses. Check with your credit union to see what type of investment or brokerage services they offer. Credit unions follow conservative investment practices, and since credit unions are not-for-profit, all earnings are returned to their members in the form of high-interest savings and low-rate loans.