Strategies For Managing Your Bank Accounts Amid High Interest Rates

As interest rates soar to a more than 20-year high, many individuals are reconsidering best practices for their bank accounts.

As interest rates soar to a more than 20-year high, many individuals are reconsidering their saving and spending habits, according to Fortune. With banks offering modest returns on deposits, the question arises: How much money should you keep in your bank accounts? While there’s no one-size-fits-all answer, financial experts offer valuable insights into optimizing your accounts.

For checking accounts, which typically offer low annual percentage yields (APYs), it’s advisable to maintain a buffer for monthly expenses. Barbara Ginty, a certified financial planner (CFP), suggests keeping one to two months’ worth of expenses in your checking account. “Often, your checking account isn’t going to pay you very much. I’d only keep a little bit of a buffer for your monthly bills,” says Ginty. “If your monthly bills are $3,000, I’d recommend keeping an extra $1,500 or $2,000.”

However, checking accounts aren’t ideal for long-term savings due to their low APYs. Instead, prioritize building an emergency fund in a high-yield savings or money market account. Ginty recommends aiming for at least two to four months’ worth of expenses in your savings account, where you can earn higher interest rates—up to 4% to 5%.

Ken Tumin, founder of DepositAccounts.com, advises exploring online banks for higher rates. Despite potential fluctuations in interest rates, savings accounts remain a secure option for storing emergency funds.

“Generally, it’s considered [interest rates] might fall by a relatively small amount [in 2024]. At the end of the year, interest rates on savings accounts should still be at a very high level compared to previous years,” Tumin states.

To maximize savings, automate contributions to high-yield bank accounts from each paycheck. This strategy prevents impulsive spending and gradually builds your savings over time. Several banks currently offer competitive rates above 5% on their high-yield savings accounts.

While it’s crucial to maintain sufficient liquidity in checking and savings accounts, avoid hoarding excessive cash. Consider diversifying your investments beyond savings accounts to capitalize on potential market gains. Balancing risk and reward is essential for long-term financial growth.

When building an emergency fund, aim for three to six months’ worth of living expenses. However, individuals with dependents or fluctuating incomes may need to save more. Even small contributions to savings can provide invaluable financial security in times of need.

Ultimately, the amount you save in your bank accounts depends on various factors, including living expenses, dependents, and risk tolerance. By prioritizing liquidity in checking and savings accounts while strategically investing for the future, you can achieve financial stability and peace of mind in uncertain times.