Where Should You Keep Your Money?

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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 might 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.

Note

Those who prefer to hold onto their cash might not realize the growing number of options available to protect their money while keeping it accessible.

Types of Banks Available

A traditional brick-and-mortar bank that is well-known might be your first choice if you don't yet have a bank account or are thinking about switching banks.

Community banks, online-only banks, and credit unions are all excellent options. There might be rewards accounts with incentives, high-yield accounts that pay better interest, and other perks that can benefit you within these institutions,

It can be difficult to choose with so many options. Be sure to look at fees and hidden costs that banks 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, withdraw funds from an ATM, or speak with a banker.

Online-only banks, community banks, and credit unions are known to have the least fees. Online-only banks have low overhead because they don't have to pay for physical locations. They're also convenient because they're accessible on the internet and from your smartphone, giving you access to your funds any time, day or night.

Note

Community banks and credit unions focus on the people they serve and are more lenient with interest rates and fees than larger banks.

Paying for Daily Living Expenses

You should have access to your money right away if you intend to use it to pay for everyday expenses. You can carry cash and open your wallet to make purchases, but a checking account can offer more protection. The FDIC insures your deposits up to $250,000, 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.

Tip

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

Always make sure to keep a buffer in your checking account to avoid overdraft fees. Buying lunch with your debit card could result in a negative balance if you forget about a monthly bill being withdrawn from your account. You'll likely be charged an overdraft fee for overdrawing your account. 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. Not having enough money in your bank account when you want to buy something new for yourself isn't an emergency.

You should only access the cash in your emergency fund when there's an actual emergency. Most experts agree that emergency funds are for things you cannot anticipate ahead of time. They might include the loss of a job, injury or illness, or your old furnace finally biting the dust during a cold January. An amount equal to three to six months' living expenses is recommended.

Open a separate savings account at a different institution than you use for your regular savings If you can't trust yourself to leave your emergency fund alone. 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, it won't be as tempting to go to the ATM to withdraw money, but you can still access your funds when necessary.

Long-Term Savings Goals

You might find it difficult to prioritize if you have one primary saving account with a total of $20,000, but multiple savings goals. It can be wise to separate your savings goals in this situation.

Many banks, especially online banks, allow you to open an unlimited number of sub-savings accounts. You can 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 your next vacation.

Tip

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

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) might be your answer. These savings accounts typically offer higher interest rates than standard savings accounts. 

Both money market accounts and CDs can require higher opening balances than regular savings accounts, however. You might 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 each month and earn a decent return at the same time because they pay interest. 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. You're required to keep your money in the CD for a specific period of time. Withdrawing the cash before the CD has matured will result in an early withdrawal penalty.

Note

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

Setting automatic deductions from your paycheck to an employer-sponsored 401(k) plan is one of the easiest ways to start saving for retirement.

You might also be eligible to open a traditional or Roth IRA, which is important if your employer doesn't offer a 401(k) plan. Money can't be withdrawn from a traditional IRA without a 10% tax penalty on top of regular income tax until you reach age 59 1/2. Exceptions to the penalty exist for situations such as using the money to buy your first house.

Warning

You can withdraw contributions you've made to a Roth IRA without penalty at any time, but you don't get a tax deduction for those contributions at the time you make them.

You'll face penalties for early withdrawals from a 401(k) plan, but these plans often come with the option for your employer to match your contributions up to a certain amount. Experts recommend contributing up to the match and saving any additional funds in an IRA.

Saving Money for Education

It might not be enough to overcome inflation if you've been saving money in regular savings account for your child's education and your child is still young with a long way to go before college. The cost of tuition is almost certainly going to rise. Consider keeping your savings 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, another relative, or even a friend.

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

The Bottom Line

Ultimately, your 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. You might have to pay a penalty if you withdraw your money before a specific time in some cases, but 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.