For years, savings and checking accounts provided very little interest income. However, in our current inflationary age, interest rates are on the rise. What is also on the rise is the return of traditional banking products. Here’s a look at how your bank accounts traditionally work as a team to give you the best security and value for your money.
The current account: 30 days of funds
Primary objective: Chequing accounts enable financial transactions. So store enough cash here to pay immediate expenses. With checking accounts, you are entitled to numerous withdrawals and unlimited deposits. The trade-off for having an account where money is available at all times is usually a much lower (or virtually non-existent) interest rate.
Action Item: Determine what your 30-day cash needs are and limit the cash available in your checking account to that amount. Also consider setting up a link to another account. Most banks allow this so you don’t incur overdraft fees. Consider looking for a checking account that also allows for automatic transfer of excess funds to a higher interest savings account.
Basic savings account: two to six months of funds
Primary objective: To store your money in a safe place so that you can use it to pay for scheduled periodic expenses over the next two to six months. This is also where many store their emergency fund. Although these accounts typically only earn a modest amount of interest, their security and reliability make savings accounts a great choice for storing the money you need for the next 12 months. This is often also your overdraft buffer in case your current account is overdrawn.
Action Item: Calculate your expected periodic expenses over the next six months and limit the cash in your savings account to that amount. You don’t want balances to be too high, because you can usually get better interest from other banking products, and if a thief has access to your debit card, you can limit the damage they cause if that account fails. savings is linked to your current account.
Higher Interest Bank Accounts: Lots of Choices
Primary objective: There are several types of bank accounts to store your money beyond what you need for short-term expenses. High-yield savings accounts, money market accounts, and certificates of deposit (CDs) all offer at least 10 times the interest yield compared to a regular savings account. But in exchange for a higher interest rate, there are rules that govern how long you must leave your money untouched in these accounts.
Action Item: Review your bank’s alternatives for longer term savings. Pay attention to interest rates and how often they adjust to the market. If CDs are your bank’s strength, consider creating a ladder of expiration dates to make your money more available. On high-yield accounts, the interest rate often increases with higher balances, so know what products these are. It’s also a good idea to talk to your banker to review your options.
When trying to decide where to keep your money, you also need to consider the tax ramifications. So keep that in mind when looking at how your bank accounts work as a team.
— By Nancy J. Ekrem, CPA
DME CPA Group PC
Chartered Accountants and Business Consultants