The cash sitting in your checking account: what idle savings really cost

The Federal Reserve left its target range at 3.75% to 4.00% on October 28, with two officials voting for a rise. For savers that confirms a second year in which cash can earn close to 4% without being locked away or put at risk. The average American savings account, meanwhile, pays 0.62%.

That gap is the whole story. Money left in a checking account loses twice, once in interest never earned and once in purchasing power, and US inflation picked up to 3.7% in September from 3.4% in August.

The gap nobody notices

Bankrate’s survey puts the national average savings rate at 0.62% APY. The best accounts pay around 4%, and the top of the daily tables touched 4.70% on October 28. These are not exotic products but federally insured online savings accounts with no lock-up and same-day or next-day transfers.

The money involved is not marginal. US households and non-profits held about $5.76 trillion in checkable deposits and currency at the end of June, on the Federal Reserve’s own financial accounts, and a 0.62% average says most of that cash is not being paid for. Branch networks have little reason to lift their rates while the deposits stay put, so the real gap runs between what the biggest banks pay and what online banks offer.

On $30,000, one year of that difference looks like this:

• at the national average of 0.62%: about $186
• at 4%: $1,200
• at 4.70%: $1,410

None of that arithmetic is difficult. The reason the money stays where it is has nothing to do with arithmetic.

The $35,000 that never moves

Sam Krupit, Accredited Financial Counselor and founder of Goalpost Finance, a financial coaching practice in Lakeland, Florida, spends his days with people who earn well and still feel stuck. The same balance keeps showing up.

«One pattern I’ve encountered in coaching is clients keeping significantly more cash than necessary in checking accounts because seeing the larger balance makes them feel secure», says Sam Krupit.

The example he uses with clients starts at $35,000 sitting in a checking account.

«To put the opportunity cost in concrete terms, consider someone with $35,000 sitting in a checking account earning essentially nothing. If they determined that $5,000 was sufficient for their normal checking buffer and moved the remaining $30,000 to a savings account earning 3.3% APY, that money could earn roughly $990 over a year», he says.

It is a representative case from his practice rather than one client, and his 3.3% is conservative by current standards: at the 4% widely available today the same $30,000 earns $1,200.

What makes the example useful is the diagnosis attached to it.

«The biggest obstacle usually isn’t a lack of knowledge. It’s inertia and the feeling that money is somehow “safer” or more accessible when it sits in checking», says Krupit.

The trade-off people think they are making is smaller than it feels.

«A high-yield savings account where money is easily transferable can still keep emergency savings liquid while allowing the money to earn interest», he says.

His rule is deliberately plain.

«My general advice is to keep a small buffer, and keep all additional savings in a separate but easily accessible HYSA», he says.

In his own example that buffer is less than a sixth of the balance, which is the part most people have backwards. The question is not whether to keep cash within reach, it is how much of it needs to sit in the account that pays nothing.

Britain’s £324.8bn, Europe’s 0.29%

The habit is not American. In the United Kingdom, where the Bank of England has held Bank Rate at 3.75%, an analysis by the savings app Spring of CACI’s current account database, reported in February, found £324.8bn sitting in current accounts paying no interest at all. More than 6.5 million of those accounts hold over £10,000 and about 340,000 hold over £100,000. The same analysis found a further £71.3bn in adult savings accounts paying 1% or less, across 22.4 million accounts, which says the problem is not only the current account but the savings account nobody has revisited since opening it.

In the euro area the leak is quieter and wider. The European Central Bank raised its deposit facility rate to 2.50% in September and said the risks to inflation remain on the upside. Its own bank interest rate statistics- show that households’ overnight deposits, the money in ordinary current accounts, paid an average of 0.29% in August, while new household deposits with an agreed maturity paid 2.18%. Euro area inflation was confirmed at 3.8% in September, a three-year high.

Inflation is the real benchmark

Interest forgone is only half the cost. The other half never appears on a statement.

AFTER 10 YEARS	NON-INTEREST CHECKING	AVERAGE SAVINGS (0.62%)	BEST SAVINGS (4%)
$10,000, nominal	$10,000	$10,638	$14,802
$10,000, in today’s money	$6,954	$7,397	$10,293
$50,000, nominal	$50,000	$53,190	$74,012
$50,000, in today’s money	$34,770	$36,987	$51,466

The figures assume inflation holds at September’s 3.7% and rates stay where they are. They are a simulation, not a forecast, and interest is taxable.

Read the bottom rows twice. At 4% a saver roughly stands still in real terms, while the same money left in a non-interest account loses about 30% of its purchasing power over a decade. Moving cash at these levels does not beat inflation. It stops inflation from taking a third of the balance.

That calculation changes if inflation falls back towards the Federal Reserve’s 2% target, because the same 4% account would then gain in real terms instead of treading water. It is also the argument for closing the gap while rates are still high rather than after the next cut.

How to size the buffer

• Name the number. Work out what the month’s bills and the next known expense actually require, then treat everything above it as savings rather than spending money.
• Move it once, automatically. A standing transfer on payday settles the decision that inertia keeps winning.
• Check the transfer time, not only the rate. Same-day or next-day access is what turns a savings account into a usable emergency fund.
• Re-read your rate when the central bank moves. Banks pass on cuts faster than increases, and last year’s headline rate can be this year’s average.

Frequently asked questions

How much should stay in checking?

• Enough for the month’s bills and the next expense you can already name. In Krupit’s example that is $5,000 out of $35,000, less than a sixth of the balance.

Is a high-yield savings account risky?

• At a federally insured bank deposits are protected up to the FDIC limit of $250,000 per depositor, per bank, per ownership category. The rate is variable, which is the real difference from a certificate of deposit.

Does moving money protect me from inflation?

• Not completely. With inflation at 3.7% a 4% account roughly keeps pace before tax, while a non-interest account loses ground every month.

Prefer this in Italian? We ran the same story, with the Italian numbers, in the Italian version of this article-.