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Checking accounts aren't for saving

Dear Money Matters,
I have $10,000 in a checking account. What is the best thing to do to earn the most money? I'm 60.
Carol

Dear Carol,
First, I take it from the wording and tone of your question that you are more concerned with return of your money than return on your money. There are, of course, scads of investments from which to choose, including stocks, bonds and mutual funds, but I'm going to focus my discussion on investments oriented toward savings.

I'm also going to confess to a prejudice. I've never been a huge fan of keeping more money in a checking account than absolutely necessary. For one thing, if you're using a conventional checking account, your money earns no interest. Moreover, if you opt for an account with interest, the returns are paltry and usually require you to keep a larger minimum in the account. Fall below that, and you're hit with monthly fees that more than erase any interest earned.

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But that doesn't make checking accounts the Evil Empire of the financial universe. Rather, it illustrates the importance of using one effectively, in conjunction with other vehicles to get the most from your money. Think of your checking account as a money bucket with a steady leak in it: your routine monthly bills. You never want the bucket to be empty, but you never want it overflowing, either. Add up your monthly bills and use that figure to put a mark on the side of the bucket. That's how much money you should pour in.

One alternative to a checking account is a money market fund. These pay a modest return (use Bankrate's money market search engine to see current rates). Although money market accounts offer check-writing features, they limit the number of checks you can write on the account each month. Many also mandate a minimum amount for each check (with mine, for instance, you can't write a check for less than $100). That makes money market accounts pretty unsuited for quick trips to the grocery store and the like.

So consider your monthly bill-paying needs. Tally up your monthly needs that could best be served by a conventional checking account -- small bills and routine pocket money needs. That would probably serve as a reasonable estimate of the minimum you should probably keep in the account. You may want to earmark extra for emergencies and other unforeseen expenses, such as when you need to write an unexpectedly large check on the day before payday.

Place the remainder in the money market and, if need be, move any funds you may need from there into the checking account. That way, you remain reasonably liquid while keeping as much money as possible in something that's at least offering a modest return. Monitor how it works from month to month and, if need be, adjust the amount you transfer from the money market to the checking account.

Another issue to bear in mind is whether you have the option of locking up the money for a certain period. If you can do without a portion of the cash for a while, consider earmarking a portion for a certificate of deposit. These are a savings contract. You give the bank or some other institution your money, they hold onto it for a specified period, then you get the money back, plus interest.

CDs have slightly better returns than money markets. Use Bankrate's CD search engine for current rates. They are also FDIC insured up to $100,000. The drawback is that your money is locked up for the specified life of the contract. You pay penalties and lose interest should you withdraw the money sooner than that. So, depending on what your ongoing cash needs might be, adding a CD to your overall saving plan may prove worthwhile.

However your mix ultimately works out, I would again urge you to keep as little money as possible in the checking account. It may be accessible, but that's the beginning and the end of its advantages.

-- Posted: Aug. 12, 2002

More Money Matters columns
See Also
FAQ about CDs
Money market search for best rates
CD search for best rates
More Money Matters stories

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