5 Better Places to Put Your Money Than a Checking Account

When the Federal Reserve Board conducted its 2022 Survey of Consumer Finances (SCF), the median household checking account balance was $2,800. However, there's nothing magical about the number $2,800. Say a person has $2,800 in their checking account but has $5,000 in bills due. That doesn't paint such a rosy picture. But what if the same person has $10,000 in checking with $5,000 in bills due? That might seem better at first glance, but in reality, that's not necessarily a great scenario either.

Keeping extra money in your checking account may feel good, but it's not always the best financial decision. The reason is simple: Money kept in a standard checking account fails to keep up with inflation. In other words, it will be worth less next year than it's worth this year. Here are five other spots where your extra funds are far more likely to benefit you.

1. A high-yield savings account

If you've never put money in a high-yield savings account before, here's what you need to know:

• Like other deposit accounts, high-yield savings accounts are FDIC insured (at FDIC-member banks) or NCUA insured (at NCUA-member credit unions). That means if your bank or credit union goes belly up, your account will be insured for up to $250,000 per depositor, per bank or credit union, per category. In other words, your money is safe.
• You don't have to open a high-yield savings account at your current bank or credit union. You can shop around to your heart's content. As of this writing, some high-yield accounts are paying an annual percentage yield (APY) of more than 5%.
• It's fast and easy to open a new account. Given the number of online banks (with fabulously low overhead), you don't even have to leave home.

2. An emergency savings account

If you read many personal finance articles, you may think we harp on building emergency savings accounts. Spoiler alert: We do, but there's a really good reason for it. An emergency savings account is like a dam you build up around your finances. It's there to protect you when an unexpected storm (like illness or job loss) hits.

Imagine it's the 4th of July. A neighbor is setting off bottle rockets, one lands on your roof, and a large portion of the roof burns. You have homeowners insurance (whew!), but your deductible is $2,000. Having an emergency account means being able to cover your deductible without going into debt. Otherwise, you may find yourself using a credit card to cover the deductible and paying interest on the debt until it's paid in full.

In short, an emergency fund can save you money.

3. Put it toward high-interest debt

Ask anyone who refuses to carry high-interest debt from month to month. Chances are, they'll tell you they've watched someone they care about struggle with debt, or they've struggled with it themselves. Rather than allow money to linger in checking, why not apply it to the kind of debt that slowly strangles your finances?

Here's a quick illustration of what we mean.

• You have a credit card with a $5,000 balance. The interest rate is 19%. Without fail, you make a monthly payment of $125 toward the balance. Still, it takes you five years (60 months) to pay the credit card off in full, and you end up paying $2,771 in interest. That's $2,771 you could have used to replenish your emergency fund or to pay off another high-interest debt.
• You use the extra money in your checking account to pay off the high-interest debt. Now, instead of paying interest, you have an extra $125 per month to build up an account that pays you interest.

4. A money market account (MMA)

Most banks offer MMAs, a cool interest-bearing account that may best be described as a combination of checking, savings, and investment accounts. Here's a quick rundown of MMA highlights:

• Pays interest (with some banks currently offering an APY over 5%)
• Most come with checks and debit cards, making withdrawals easy
• As long as the MMA is an FDIC or NCUA member, funds are insured up to $250,000.
• You can make unlimited monthly deposits to an MMA, although your financial institution may limit how many checks you can write against the account without paying a fee.

5. A certificate of deposit (CD)

A certificate of deposit (CD) is also a great place to keep your money safe while watching it grow. A CD is like a savings account with a twist: Unlike with a savings account where you have more flexibility to withdraw your funds when needed, you generally promise to keep your money in the CD for a specific amount of time. In return, a bank or credit union promises to pay you a set amount of interest. Terms (the amount of time you promise to leave the money) vary -- typically ranging from three months to five years. Interest rates also vary based on the term you choose. Like other deposit accounts, CDs offered by banks and credit unions are insured for up to $250,000.

The upside: Let's say you put your money in a CD with a term of three years. That means the bank or credit union can't lower the rate it pays you, even if interest rates tank during that time.

The downside: If emergency strikes and you need to withdraw your money before the term of your CD expires, you could get hit with an early withdrawal penalty.

Leaving a "buffer" of money in your checking account makes perfect sense when you're trying to avoid overdraft fees. However, it makes little sense if you're losing out on interest you could be earning by depositing a portion of it into another account and watching it grow.