Wednesday, 24 June 2020

6 Bank Accounts You Need To Have

Bank Accounts

In this article, I am going to be discussing the six bank accounts that you need to have. Over the past five years, I have played around with a number of different money management and budgeting systems. And this is the particular setup that has enabled me to ensure that my money is managed very efficiently and everything that I earn has a specific name and everything is neatly organized and has a specific purpose. I find that when your funds are not clearly marked and they don't have a specific purpose it can be hard to manage your money and it is definitely harder to reach your goals, or you might end up spending all of your money because it is not organized and everything is jumbled up between one or two accounts.

Most of these accounts that I will be mentioning today did take me years to build up, so keep in mind that this is definitely a process and it took me a very long time to get all these accounts set up and it definitely took me a long time to get all of them funded. But no matter where you are starting from I want to encourage you to start building some healthy money habits. I do think having healthy money habits is a form of self-love because when you have healthy habits it allows you to better take care of your self financially and to watch out for yourself financially and you can start making your way towards gaining some financial security.


Let's jump into the six accounts 


1. Checking Account

I don't have too much to say about checking accounts right now I am sure most of you reading already have one, but this is basically where your salary is getting paid into, where any payments are getting paid into, and also where you are going to be paying most of your bills out of.


2. Emergency Expense Account

This account is for things that are emergencies. And to me I guess I define an emergency as something that happens unexpectedly and it is something that you do not have time to save up for, you know, something happens instantly and it needs to be taken care of right away, you do not have two months, three months, six months, or a year to save up for it and to budget for this. It is just something that needs to be taken care of. You get in some sort of an accident, your dog gets sick, your cellphone breaks and you need to replace it instantly or things like that. 

For this account you want to make sure that it is highly liquid, I do keep mine at my regular bank so I do not have it anywhere special, it is just in a regular savings account. So for me, I keep $3,000 in my emergency expense account and it is hard for me to gauge how much you would need to have, but I think maybe one month of income or one month of expenses might be a good starting point, but it depends on your lifestyle, because for some people a flat tire might not cost a lot to fix depending on the model of their car, where they live, and for some people that could be a big expense. It depends on your lifestyle so I think it is good to consider some emergency expenses that could come up, maybe some that have come up in the past and decide how much you would like to have in your emergency expense account 


3. Emergency Payroll Account

I consider this like self-funded paycheck insurance, that's what I would describe this as. This account is basically dedicated to replacing some of your income if you lose your job. I like to separate my emergency funds as you can see the first one is expensive, actual purchases that come up, things you need to buy and spend money on instantly, and the payroll account are just to replace a bit of income and cover expenses in case of a job loss so that is why I call this the payroll account. I would definitely recommend that you keep the money for this account in a separate Bank. Do not keep it where you normally bank, where it is accessible in your online banking and it might be a bit tempting to just make a quick transfer here and there if you need some money.


  • If you have this kind of fun this is a gift to yourself that you worked really hard to build up and you want to keep it that way, so the best thing you can do in my personal experience is keeping it inaccessible at a different Bank that you do not have attached to a debit card, you don't have a checkbook or anything like that, it is just there in that Bank and you know that you can have access to it and in a real emergency situation, but not very easily. Because this is an account that you do not want to touch, you are not going to use it for vacation or things like this. 

Most experts would recommend that this account would have somewhere between three to six months worth of expenses in it, I personally keep four months of bare-bones living expenses in my emergency payroll fund, because of course, you want to have the balance between, you do not want to have too much sitting in this account because you could be using it for other things so there is a bit of an opportunity cost there. If you want to invest it or put it into other things, you do not want to just have the biggest emergency fund possible, that might also not be a good idea, but you do not want to have a slim or trim of an account either.

If you are not sure how much you should have in your account I think it is good to look once again at your personal risk factors. If you work in a highly volatile industry or you are self-employed or you have a higher chance of losing your job or say you have children and mortgage and all of these kinds of things, you are going to want to have a much higher emergency fund than somebody who's single and can get a new job relatively. So consider your personal risk factors and also your personal risk tolerance. For me personally, four months is enough to give me peace of mind. And having this account fully funded has absolutely changed my life, I have much more peace of mind,  I feel like I make decisions differently as well, just knowing that I am going to be okay in most situations and it is an amazing thing that I cannot even describe. 


4. Spender Account

I have not heard anybody else talk about having a spender account or a spender fund, but this is something that for me is really important. I decided to start this concept of a spender fund because I am a very frugal person and sometimes I am way too frugal to the point where lower my own quality of life because I have to frugal. So having this spender fund gives me permission to spend. 

If you are a person that struggles to allow yourself to buy things that you might need or just feel like they might enhance your quality of life or they might bring you some happiness, I would definitely recommend having a spender fund. For me the spender fund its permission to spend, it gives me permission to spend, one other thing that the spender fund is great for is last-minute travel or fun activities, say you have some friends that invite you for a weekend getaway somewhere or invite you to something, and you want to go, but you are working on being financially diligent, you do not want to harm your budget. Having that spender fun can give you that permission to go because you planned for it.

I personally keep my spender fun on a prepaid credit card and I always keep $1,000 on it, but the trick is to not keep this prepaid credit card in your wallet, do not carry it around with you or all the sudden every time you want to go to Starbucks or go buy any little thing, you will be putting it on your spender fund. I have made that mistake in the past, and if I have that spender fun in my wallet I spend it, so I keep it at home in my file because the spender funds should be used on things that are special. I guess, I did not say that yet, but it is for things that are special at least for me, I mean, you can spend your spender fun however you want.


5. Retirement Account 

You should make sure that you have one, and that you are contributing to it every single month, if you are employed in the USA, you probably have a 401K and you want to make sure that you are taking advantage of any employer matches that you are contributing. If you are self-employed in the USA make sure that you have an IRA and that you are contributing to that every single month. And if you are outside of the USA make sure you understand your options in your country and I also want to point out here that, I think when it comes to saving for retirement it is important to take ownership over your retirement account, it is great to get help from friends, family, financial advisors, and people that know about investing and that has the experience, but do not just take their word and run with it, if your employer tells you to do a specific thing, do not just take their word and run with it, it is good to get help, but you need to take ownership over those accounts and take ownership of your financial future.

Make sure you at least have a basic understanding of investing, where those funds are invested, what kind of industries, understand what dividends are, understand how does your portfolio look like, ask any questions that you have, there are so many resources out there where you can learn all about investing and diversification and all of this stuff and I want to encourage you to take some ownership and take the time to understand where your money is going.


6. Individual Brokerage Account

In most countries I know in the USA there is a cap on how much you can contribute to those retirement funds, usually, they cap you at a certain amount, so if you are a person that is hitting that maximum, you are definitely going to want to have a brokerage account so you can continue to do investing beyond just your retirement, or even if you are not hitting the max on your retirement you may want to get a brokerage account just to do some investing on the side. If you are looking to educate yourself I know sometimes certain jobs restrict how you can invest your 401k, so having an individual brokerage account will allow you to invest with more flexibility and also you do not have the penalties for taking out the funds before retirement age as you have with retirement accounts.

I do have a retirement account as well as a brokerage account myself and I enjoy learning about investing and looking at my portfolio and going in every single month and seeing how my net worth is growing and seeing compound interest working and I cannot underpin enough how empowering and liberating it is to understand these concepts.





Conclusion

That is it for my list, I know six accounts sounds like a lot, but if you want to build long-term financial independence, it goes beyond earning money and saving money, there are a lot more things that you need to consider. It is important to prepare for all future possibilities including bad things happening because emergencies happen and you need to be prepared for it and you definitely need to be prepared for your retirement because most of us will get old.

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