Where Should You Keep Your Money?

Deciding to Keep Your Cash at Home vs. the Bank

We've managed our budget so well this month
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If you're wondering whether it is better to have cash at home or money in the bank, you're not alone. Where you keep your money depends on your financial goals. Many people want to use their money to pay for retirement, education, gifts, or vacations. You may also want a separate account to save for home projects or to manage day-to-day expenses.

Most people keep their money at an online or brick-and-mortar bank or credit union. It's common to have a checking account and a separate savings account to manage long-term financial goals. Some people don't believe in banks and keep their money at home.

Those who prefer to hold onto their cash may not realize the growing number of options available to keep the rest of their money organized. Plenty of benefits also exist to protect your funds and still have it handy when you need it.

Types of Banks Available

If you don't yet have a bank account or are thinking about switching banks, there are many types of banks available to pick from. A traditional brick-and-mortar bank that is well-known might be your first choice. However, many people are unaware of the number of options available.

Community banks, online-only banks, and credit unions are all excellent options. Within those different types of institutions, there might be rewards accounts with incentives, high-yield accounts that pay better interest, and other perks that can benefit you.

With so many options, it can be difficult to choose. To help you decide, make sure you look at fees and hidden costs the bank might charge. Selecting the bank with the lowest fees is a smart move. You shouldn't have to pay monthly fees to keep your money at a bank, to withdraw your funds from an ATM, or to speak with a banker.

Online-only banks, community banks, and credit unions are known to have the least amount of fees. Online-only banks have low overhead because they don't have to pay for physical locations. They're also convenient to use because they're accessible on the Internet and from your smartphone, giving you access to your funds at any time, day or night. Community banks and credit unions focus on the people they serve and are a bit more lenient with interest rates and fees than larger banks.

Unfortunately, with any of the big names out there, you're going to face a slew of fees, minimum deposit and balance requirements, and other rules. Before you pick a bank, read the fine print.

Daily Living Expenses

To pay for everyday expenses, you should have access to your money right away. You can carry cash and open your wallet to make purchases, but a checking account can offer more protection. The FDIC insures your deposits, so there's no chance of losing your money. But your cash can be gone forever if you lose your wallet or drop a $20 bill on the ground.

When you need access to your money right away to pay for groceries, transportation costs, and other living expenses, it's wise to keep it in your checking account and use your debit card to pay for things.

However, always make sure to keep a buffer in your checking account to avoid overdraft fees. For example, if you forget about a monthly bill being withdrawn from your account, buying lunch could result in a negative balance. You'll likely be charged an overdraft fee for overdrawing your account, though the amount depends on the policies of your bank.

Your Emergency Fund

A lot of people keep their emergency fund lumped in with their general savings, but this could be a mistake if you don't have much self-control. For instance, not having enough money in your bank account when you want to buy new clothes isn't an emergency.

You should only access the cash in your emergency fund when there's an actual emergency. The problem is that everyone has a different definition of what constitutes an emergency. Most experts agree that emergency funds are for things you cannot anticipate ahead of time, such as the loss of a job, or for dire situations that are essential to survival.

If you can't trust yourself to leave your emergency fund alone until you need it, you should open up a separate savings account at a different institution than you use for your regular savings.

Having your funds at another bank creates an additional barrier between you and your money, which means you're less likely to spend it when you shouldn't.

A popular option for emergency savings is to set up an online-only savings account. They're usually much quicker and easier to open than an account at a traditional bank, and it doesn't require going to a branch. Plus, you won't be as tempted to go to the ATM to withdraw money, but you can still access your funds when needed.

Long-Term Savings Goals

If you have one primary saving account with a total of $20,000, but also have other savings goals, you might find it difficult to prioritize your individual goals. In this situation, it can be wise to separate your savings goals.

Many banks, especially online banks, allow you to open an unlimited number of sub-savings accounts. This lets you use your main savings account for short-term savings, and open sub-accounts for goals like paying for a wedding, saving for a new car, or taking your next vacation.

Having separate accounts specifically earmarked for each goal makes it easier to track your progress. For example, divide that $20,000 into your distinct savings goals, and you'll have $10,000 in your wedding account, $7,000 for a car down payment, and $3,000 in your vacation fund.

When you're ready to take the money out, your withdrawal won't interfere with your other goals. Plus, you may realize you've hit your vacation savings goal earlier than expected. This allows you to start planning your trip while diverting the money you were saving toward your vacation to your car down payment account.

If you had the original lump sum of $20,000 in your account, you might have been hesitant to withdraw any of it for your vacation since you're working on two other important goals. 

Medium-Term Savings Goals

If you're looking for a place to park your money for a few years, money market accounts and Certificates of Deposit (CDs) may be your answer. These savings accounts typically offer higher interest rates than standard savings accounts. Before you open a money market account or CD, there are a few things you should understand.

Both money market accounts and CDs can require higher opening balances than regular savings accounts. For example, you may need $10,000 to open an account at one bank, while other savings accounts can be opened with as little as $10.

Money market accounts function as a hybrid of checking and savings accounts. You can write a limited number of checks from your account and earn a decent return at the same time. Money market accounts also invest in securities, unlike regular savings accounts, which is why they can offer slightly better interest rates.

CDs are different in that they have fixed maturity dates. If you open one, you must keep your money in the CD for a specific amount of time. Withdrawing the cash before the CD has matured will result in an early withdrawal penalty. CDs are generally not a good idea for emergency funds because you want that money to be accessible without penalty when you need it.

Retirement Savings

No matter where you are in your career, you should make saving for retirement a priority. Setting up automatic deductions from your paycheck to an employer-sponsored 401(k) plan is one of the easiest ways to start saving.

You may also be eligible to open a traditional or Roth IRA, which is important if your employer doesn't offer a 401(k) plan. Money cannot be withdrawn from a traditional IRA without a penalty until you reach age 59.5, unless it's for a particular circumstance, like buying your first house. You can withdraw contributions you've made to a Roth IRA without penalty at any time. 

You'll face penalties for early withdrawals from a 401(k) plan, but the plans often come with the option for your employer to match your contributions up to a certain amount. The standard financial advice says to contribute up to the match and save additional funds in an IRA. Where you invest your money depends on how great a return your 401(k) produces and how much control and flexibility you have with the funds.

Saving Money for Education

If your child is younger and still has a long way to go before college, the cost of tuition is going to rise. If you've been saving money in regular savings account for your child's education, that might not be enough to overcome inflation. You should keep your money somewhere that can grow in value, such as in a 529 Savings Plan.

These savings plans can be a good way to pay for your child's college because they're designed specifically for future educational costs. You can open it for any beneficiary, including your child, grandchild, friend, or relative.

Individual states or state agencies sponsor 529 Plans, and they can be opened with many financial institutions. You also aren't limited to your own state's 529 Plan, so it's important to shop around to compare fees and the performance of different funds. Some states offer incentives, and 529 Plans also have many tax benefits. 

Ultimately, your savings goals will determine where you keep your money. Stashing cash at home makes it easy to access, but banks offer many benefits you can't get anywhere else. While, in some cases, you might have to wait a few days to get your hands on your funds or pay a penalty if you withdraw your money before a specific time, some savings accounts let you earn interest on your deposits, and you might sleep better at night knowing your money is insured.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.