Advertiser Disclosure: Many of the savings offers appearing on this site are from advertisers from which this website receives compensation for being listed here. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). These offers do not represent all deposit accounts available.

Checking Accounts Offer Unsurpassed, Very Valuable Liquidity

June 25, 2009

By Andrew Freiburghouse | Money Rates Columnist

People who keep more than a minimum amount of money in their checking accounts are sometimes derided as financial simpletons. The purpose of a checking account, critics claim, is to pay bills. Keeping any more money in there than is needed is foolish. Move that extra money to a high interest CD, or at least a savings account!

While it's true that you can usually obtain higher interest on other types of deposit accounts, condescending admonitions such as those above may be misguided, even missing the point entirely.

After all, the prime benefit of a checking account is liquidity. And liquidity is a very valuable thing.

Checking Account Liquidity Value Made Apparent by Comparison to Other Options

Holding all your money in your 401K or IRA, besides the risk to the actual investment, is never a good idea because those retirement accounts are relatively illiquid. It takes time, maybe even money, to get that money out.

And then there are CDs. Fantastic short-term investments, certainly, but far too many people chase an interest rate on a two year CD only to see their profits disappear because they had to take the money out early and pay an early withdrawal penalty. It's not uncommon for a two year CD to come with an early withdrawal penalty of six months interest.

Or more--no law prohibits a bank from charging a stiffer penalty, and many institutions do just that.

Savings accounts are the next step up in the liquidity ladder. You can get your money out more easily than from a CD, plus you are getting paid a higher interest rate on your deposit than the checking account option. Sounds great.

However, withdrawing from a savings account can be a headache. In the case of Internet-based banks, which often pay higher interest rates, you may have to set up a connection between your checking and your savings before you can withdraw anything from your savings. And there is no branch to walk into and complain, because everything's online.

In the case of a checking account, meanwhile, when you need cash, you simply write a check. Or, even simpler, you swipe your debit card. No early withdrawal penalties, no headaches. Just hard-earned money, easily withdrawn.

When Emergencies Happen, Checking Account Liquidity Comes In Handy

Especially if you're a bit older than the average, having $20,000 sitting in your checking account may provide a sense of security that no other investment can. You know that at any time, for any reason, you can access that cash within a matter of minutes. That's powerful.

What's more, it's sometimes necessary. Medical situations can arise, problems with children or grandchildren, car repairs, a failing bank, and so on and so forth. You never know what life is going to bring, only that the bringing is often sudden.

When you have a larger amount than is absolutely necessary sitting in your checking account, you know you have a little cushion. You know you have liquidity on your side. What's so wrong with that?

Nothing at all, if it feels right to you. A few hundred dollars in "missed" interest can be a small price to pay for the unsurpassed, very valuable liquidity provided by checking accounts.


Your responses to ‘Checking Accounts Offer Unsurpassed, Very Valuable Liquidity’

Showing 0 comments | Add your comment
Add your comment
(will not be published, required)