What Are the Best Ways to Utilize a Checking Account?

Although a checking account can be the cornerstone of personal finances, the proper ways to utilize a checking account is often overlooked. Most Americans will graduate high school or college with little direction on the appropriate accounts they should have to meet their various financial goals. A teen will often start their financial journey by opening a student checking account with a parent when he or she first starts working and earning a paycheck. After that, it seems to become a repository where all household funds are deposited with little insight as to where else those funds should be directed.

David Frederick, Director of Client Success and Advice for First Bank Wealth Management, shared some insight on the best ways to utilize a checking account for long-term financial success.

Checking Account Balances

“The checking account should only be used as a tool for cash flow.  That is, it should be topped up when paychecks come in and it should be drained every month when bills are paid,” said Frederick. “The amount of money to be kept in a checking account, therefore, is the expected amount of total bills to be paid every month (credit cards, utilities, house payments, car payments, etc.) plus a small cushion to make sure the account is not overdrawn.  Any additional use of a checking account is likely suboptimal because there are other places to put money in the bank, like savings, investments, or certificates of deposits (CDs), that will earn much better returns.” 

Frederick issued a quick note of caution. “It’s important, however, that rainy day funds kept elsewhere, such as in savings accounts, investment accounts, and home equity lines of credit can flow into the checking account quickly in case monthly bills are more than expected or in case of a financial payment emergency.”

If you would like to find out more about increasing your savings read, “Getting Started: Establishing a Financial Safety Net.”

Generational Uses of Checking Accounts

The strategy for using a checking account efficiently does not vary much across generations.  However, the actual usage of a checking account often does.  “Older generations are more likely to have access to financial instruments with a higher return, such as investment accounts and lines of credit.  Younger generations often keep proportionately more in their checking accounts because those may be the only accounts available to them,” explained Frederick. “Younger generations may also have more erratic cash in-flows and out-flows that may necessitate keeping higher amounts in the checking account.”

It’s important to keep regular tabs on all accounts, especially checking account(s). “Not only does regular monitoring help you stay on top of your finances,” he added, “but it also can help catch any fraudulent activity.” Consider using digital banking tools, like First Bank’s eBanking and mobile banking options, for the ability to check account balances as often as deemed necessary.

Pandemic’s Impact to Checking Accounts

Frederick said the COVID pandemic has not changed the conventional wisdom of a checking account strategy, but recent record-high inflation has reinforced it.  “Money held in most traditional checking accounts are likely earning near 0% in interest.  However, current inflation of around 7% means that money just sitting in the checking account is losing about 7% of its value every year.  It is especially important in this high inflation environment to keep the checking account as only a tool for cash flow and to keep savings in better places, like investment accounts.”

Financial institutions, like First Bank, do offer higher-than-average interest earnings in specific checking account products by meeting a few basic requirements. For instance, First Bank’s First Performance Checking offers account holders a variable interest rate of 3.04% APY paid on balances up to $25,000 and then 0.10% on balances $25,000.01 and greaterˡ.  “It’s certainly a great idea to take advantage of any higher accruals you can obtain on any checking accounts that you do utilize,” he added. “Doing your research to find the right checking account to meet the needs of your household should be part of your overall financial wellness strategy.”

Compare First Bank’s checking account options and open an account online today.

Future of Traditional Checking Accounts

According to Statista, 64.6% of U.S. banking clients used digital banking options in 2021. However, more Americans embracing digital banking is not expected to change or alter the trajectory of the traditional checking account. “I have not seen the traditional checking account threatened by technology,” added Frederick.  “I still see the pattern where responsible, financially-savvy individuals spend money throughout the month with credit cards, and then pay off the credit cards in full every month, along with other monthly bills, out of the traditional checking account.  Other financial accounts may be changing as a result of technology, but the trusty, old cash flow checking account does not seem to be going anywhere.”