A history of the average US current account balance in 1 graph
We all know that we are supposed to save a portion of our income for emergencies or the future, and unfortunately many of us fail in this regard. It’s estimated that 69% of Americans have less than $ 1,000 in a savings account, while one in three workers hasn’t even started saving money for retirement yet.
But maybe our low savings is not an indication that we are spending too much of our income, but rather that we are putting our money in the wrong place. According to a Federal Reserve study, in 2013 (the latest year for which data is available), the average American family had a checking account balance of $ 9,132. Not only that, but the balances in all areas have increased over time. And while having the extra money is a good thing in theory, it’s a bad move in practice.
Here is what we kept in the current accounts
Americans’ current account balances have grown significantly since 2001. At the time, the average current account was $ 6,404. In 2013, that number jumped to $ 9,132. If these numbers seem high, one can assume that it is in part because the rich are pushing the average up. But there is more to it.
The following table summarizes our collective verification habits over a 12-year period:
As you can see, current account balances climbed between 2001 and 2004, declined slightly in 2007, and then slowly but steadily recovered to a 12-year high in 2013.
Why the trend? During times of economic prosperity, many of us are more inclined to keep our money invested. When the economy collapses, we tend to take our money out of the market and keep it somewhere safe, like the bank.
Example: over 500,000 jobs were lost in 2002, and unemployment fell from 4.2% in February 2001 to 6.3% in June 2003. Moreover, 2002 and 2003 were miserable years for the Dow Jones , with the market hitting an all-time high in March 2003. All of this explains why the average checking account balance rose from $ 6,404 in 2001 to $ 7,382 in 2004.
But then things picked up a bit. Unemployment rates fell in mid-2005 and the Dow Jones fell from 7,674 in March 2003 to 10,508 in April of the same year. And consumers followed suit, letting their checking account balances gradually decline between 2004 and 2007.
Of course, this sense of economic security was only temporary. Once the economic recession of 2009 hit, many of us reverted to our old ways, keeping our hard-earned money close at hand. And because the recovery from that fight was gradual at best, it’s no wonder the average American still has over $ 9,000 in a checking account four years later. But while there may be some logic behind the decision to overfund a checking account, it is a decision that could prove costly in the long run.
Best auditing practices
So how much money should you keep in a checking account? As long as you have a savings account with enough money to cover three to six months of living expenses, you really don’t need much more than you need to pay your bills for the month ahead. .
Although some chequing accounts pay interest, most do not. And while today’s savings account rates aren’t out of the ordinary, it’s better to earn 1% on your money than nothing at all. If you open a checking account and a savings account at the same bank, you can usually transfer money between the two instantly and automatically. Additionally, you need to make sure that your checking account balance is high enough to prevent your bank from charging fees, but if you have enough money to pay three to six months of bills, you should be more than sufficiently covered. .
Also, as long as you have enough money to save for an emergency and enough money in checks to cover your short-term expenses, you should invest your excess money rather than leaving it behind. Bank. Even a relatively conservative investment portfolio can offer an easy 5% return, which is much higher than what you’ll see with an interest-paying savings or checking account.
The effects of over-reliance on current accounts can accumulate over time. Imagine putting $ 9,000 in a checking account year over year, of which $ 5,000 you usually don’t get to pay your bills. If you were to invest that $ 5,000 excess for 20 years with a 5% return, it would rise to over $ 13,000. Better yet, if you were to invest that money in stocks with an average annual return of 8%, you would have $ 23,000 two decades later.
Of course, it’s better to have extra money in a checking account than not having enough money to pay your bills. But if you put too much money in a checking account, you’ll lose a growth opportunity that could be crucial in helping you reach your long-term goals.
It is true that a checking account is a zero risk prospect; the only way for you to lose money is to withdraw it yourself. But despite the fact that the stock market has seen too many periods of volatility to count, if you’re willing to weather those ups and downs, you’ll likely make your money grow, rather than let it rot without interest. Between 1965 and 2015, the S&P 500 underwent 27 corrections of 10% or more, but it eventually recovered from each. As hard as it can be to give up some control over your finances, if you’re willing to be patient and trust history a little bit, there’s a good chance you will come out much richer in the long run.