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How can I split direct deposits between checking and saving for investing?

| MoneyRates.com Senior Financial Analyst, CFA
min read

Q: You've recommended encouraging savings by having direct deposits go into savings rather than checking accounts, but for the sake of convenience I've split the difference and allocated my paychecks 50/50 between savings and checking. By now, I've seen a considerable accumulation in my checking account, to the point where I feel I should leave enough in checking to keep the account active but invest the remainder elsewhere.

Since depositing half my pay into checking is more than covering my spending needs, going forward should I increase the deposit allocation to the savings account, or keep the allocation at 50/50 and use the accumulation that builds up in checking to diversify into more active investments?

A: You are in a good situation - not all payroll services allow you to split direct deposit allocations. You are wise to take advantage of the opportunity. It also indicates that your finances are in good shape if 50 percent of your pay is more than covering your immediate needs. So now, you have the happy problem of figuring out what to do with the extra savings.

Building up checking vs. savings for investments

Given how low interest rates on savings accounts are these days, it probably does make sense to diversify into more active investments, such via online brokers. Especially since your cash flow seems strong enough for you to avoid having to dip into savings. The question then becomes whether it is better to use the checking account or the savings account as the springboard into those investments.

Advantages of growing savings accounts

The savings account might have a couple advantages over the checking account as a place to let savings accumulate prior to investment:

1. Savings rates are higher

As low as savings account rates are, they are probably higher than the rate you are earning in your checking account, if any.

2. There are fewer chances to overspend

Having the excess accumulate in your savings account would reduce the temptation for any new spending to creep into your habits by having extra money easily accessible in your checking account.

Other considerations for direct deposit

Two other points to keep in mind as you set all this up:

  • First of all, meet balance requirements to avoid checking account fees. Make sure you don't starve your checking account to the point where you incur fees by dropping below minimum balance requirements or overdrawing the account. Those fees could easily wipe out any interest you would earn by making extra allocations to savings.
  • Second, raise deferrals for retirement savings accordingly. If your employer has a 401(k) retirement savings or other voluntary contribution plan, you might want to consider raising your deferrals into that plan if possible. This would maintain the principle of making savings automatic, but would get some of those savings directly into more active investments while also taking advantage of the tax-deferral and possibly matching benefits of a retirement plan.

Again, it sounds like you are dealing from strength financially, and incorporating more long-term investments into your plan should only strengthen your position.

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