After monthly expenses have been paid you may be left with excess cash in your checking account. Many individuals allow these funds to build up at the bank without a second thought. In this low-interest rate environment, rates offered by many banks aren’t keeping pace with inflation. It’s important to have a safety net of resources should an emergency arise, but at what point are you sitting on too much cash?
Setting targets for cash balances and having a plan for excess cash will help prevent unnecessary accumulation of resources in low yielding accounts. The following will help you determine if you are “cash heavy” and offer options for any surplus.
Priority 1: Build up a buffer of three to six months of your expenses in a high-interest savings/money market account.
Priority 2: Pay off any existing high-interest rate debt.
Priority 3: Once an adequate emergency fund has been established and you have no high-interest rate debt to worry about, consider investing in a brokerage account.