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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.
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
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