Did you know you could max out your checking account?
Did you know it could cost you millions of dollars?
A few years ago, I was speaking to a friend. Successful, high-achieving type.
Since a consulting job right out of college, he had been diligently contributing to his 401(k), had an emergency fund, and carried no credit card debt. Rock solid foundation.
As he climbed the corporate ladder, his income grew. Each year, he saved a bit more until he was maxing out his 401(k) every single year.
But, he had money left over and didn’t know what to do with it.
This is where the problem started.
After doing all of the "right things", he simply stopped. Every extra dollar stayed in his checking account.
He ended up with over $150,000.
Now to the untrained eye, this seems like an absolute win.
And to be clear: This is a very small “problem” compared to others in the world.
But stay with me.
This was a massive problem of opportunity cost.
How?
Anything you do with money is a decision to not do something else with that money.
Leaving $150,000 in his checking meant he didn’t spend $150,000 on cars or watches - probably a good thing.
But it also meant he never invested a dime and missed 10 years of investment growth.
Until that day, he had no plans to change that for the rest of his life.
I was floored and begged him to meet with me so we could talk about that cash in more detail (it was actually one of my first early Fast Start Sessions).
When we met, I showed him this chart
I said, the blue is what you’ve got, the green is what you’ll anually add.
Do nothing else and 25 years from now you’ll have $525,000.
An amazing amount of money.
But see that red?
That’s your opportunity cost.
If you instead invested that, over the next 25 years you could have over $2 Million.
We had a nice long pause after that I tell you what.
His response though was fascinating and one of the things I hold on to every time I talk to people about their money.
He said “But I don’t know how to day trade”
This business school educated, high achieving worker had, for one reason or another, never learned the concept of index funds.
He knew the boring-company 401(k) and he knew crazy day-trading YouTube videos.
No in-between.
No wonder he didn’t want to leave his checking account.
So I told him to go to Fidelity (his 401(k) provider) and ask them three things:
- How can I open a brokerage account?
- What are low cost index funds that fit my financial goals?
- And how can I automate my contributions once I bring my initial money over?
Those three questions have changed his life.
Now, he will eventually grow a nest egg most can only dream of.
He wouldn't have it if his checking account was maxed out.
Is your checking account maxed out?
If you have more than 2 months of expenses in your checking account ask yourself: What is this money doing?
If the answer is nothing (and assuming you have an emergency fund elsewhere), it’s time for that extra money to get to work.
Give a ring to your 401(k) provider and ask them the questions above or click the link here to set time with me to think through how much is right to keep in your checking account.
You can’t technically max out a checking account.
But keep too much in there and you'll absolutely miss out.
