Why you should keep your everyday bank account to the bare minimum
When you sign up with a bank, you are likely to receive two accounts – one for everyday transactions and one for savings.
A transaction account usually comes with a card so that you can withdraw cash at the ATM and pay day-to-day expenses. On the other hand, a savings account does not usually have a linked card – but it offers higher interest rates compared to the transaction account, allowing you to grow your balance.
Many people put a large sum of their money on their transaction accounts for practical purposes – who knows when you need to make a major purchase? – but experts say this move may not be so wise in the bigger picture.
“I … realised that money sitting in a debit account just, well, sits there,” Laura Munoz of The Financial Diet wrote. “It doesn’t earn interest and it’s not working for you, so there’s no real reason to keep more than a healthy buffer there in case you need to take out cash in a pinch.”
While it is important to maintain a healthy balance to pay bills and everyday needs in your transaction account, Munoz said savings should be prioritised before spending. By working out how much you roughly spend every month, you can plan ahead and keep only the bare minimum amount in the transaction account to cover everyday expenses while transferring the rest to the savings account immediately.
As MoneySmart advises, “Only keep the money you need to cover your everyday costs in your transaction account. Put the rest of your money in a savings account and watch your savings grow with the extra interest.”
This can also help you curb your shopping habits, as the limited amount will make you more aware of the dollars you fork out.
Munoz said she is now putting most of her cash in two places –a high-yield, risk-free savings account and another savings account that is invested in the stock market. This does not have to be the case for you if you are more risk-averse – find a savings account where your earnings can comfortably grow, and make money work for you.