Why Checking Accounts Aren’t for Investing
Checking accounts are a necessity for most adults, but some are better than others. When you opened yours, you probably shopped around for the best Huntington checking account rates before making a decision. That’s what most depositors do–invest in accounts that will produce the greatest return.
It is important to note, however, that a competitive checking account interest rate is a nice perk, but the account itself should be viewed as a financial tool, not an investment opportunity. The following are answers to a few questions you may have that help explain why checking accounts aren’t for investing.
What Exactly is a Checking Account?
Checking accounts are offered by financial institutions like banks and credit unions. They are accounts designed for handling every day transactions and exist to facilitate those transactions when exchanging actual currency is unsafe or inconvenient.
The money in a checking account is completely liquid and pay-on-demand. Funds can be accessed with checks, a debit card, ATM withdrawals or in person at a branch location.
Why are Checking Accounts a Poor Investment Choice?
The fundamental characteristic of a good investment is that it generates more money than what you originally started out with. The way most investors make money from deposit accounts is by earning interest. The higher the interest rate, the greater the earning potential.
Unlike accounts offered as investment options, checking accounts do not provide high interest rates. The reason for this comes down to how banks make money. Banks use customer deposits to fund loans and collect interest on those loans. Checking accounts are demand accounts and therefore, banks must always have the cash available for the customer to withdraw. They cannot collect interest on your deposits and thus, can’t afford to pay you much interest either.
Checking accounts are purely functional and will not noticeably contribute to your wealth. Though they’re important, they should not be incorporated into your investment strategy.
How Do I Find a Better Investment Option?
There are a multitude of deposit accounts that make viable investment options.
Remember, accounts that are more profitable for banks are more profitable for you, too. The more money you invest and the longer you keep it on deposit, the higher the interest rates a financial institution will offer you.
For example, a certificate of deposit account can earn much higher interest rates than a checking account because you commit to a long-term investment period. During that time, you do not make any withdrawals and the bank is free to loan that money out at a high rate. You are then rewarded with high interest, too.
Checking account interest rates are important. Obviously, it makes sense to choose one with a high rate over an account that will earn nothing. When it comes to actual investing, however, alternatives should be considered instead.
