Five and a Half Accounts You Need and When You Need Them.

To be successful with money in this day and age you need to have some accounts. These accounts make it easier to buy things, get loans and even get a job. Exactly which account you need depends on where you are in your financial journey and what you want to accomplish.

 

First I would recommend that parents get their kids a savings account. It helps kids learn to save. It also helps keep money from burning a hole in their pocket since some of it will be sitting safely in a savings account they can’t access without their parents help.

 

A few things to keep in mind with these accounts. Don’t pay fees. Bank accounts don’t have to have fees. There will always be rules to get out of the fees. Ask about them before you open the account. Go to a different bank if you need to. All of these accounts can be opened without having to pay fees. You just may need to look around a little.

 

  1. A savings account.

I recommend everyone get a savings account. This is where all your extra money goes at first. Anything you don’t need day to day and month to month. This will make it harder to waste the money on little things throughout your day. Your bank will pay you a little bit of interest when you have money in your savings account. It’s better to collect interest than pay interest. You can also access the money easily, though most banks will limit the number of withdrawals each month to between 3 and 6. When you have a job, put a little bit in there every month. While you’re just starting your financial journey you should build this up to about $1000. That’s enough to cover a minor emergency if you have one. So it will give you some cushion.

  1. A Checking account.

Get one of these with your first paycheck. Having a checking account starts to build your record with the bank. It also gives you a safe place to store your money and services like check writing, ATMs, money transfers, and debit cards. Always track how much you have in your checking account. You can do it manually or use a service like Intuit’s mint.com. Never pull out more money than you have in the account. This is called an overdraft. Banks charge high fees when you do that. It also makes it harder to get a loan if you have too many overdrafts.

  1. Certificate of Deposit.

Certificates of deposit or CDs are similar to savings accounts. You put money in and the bank pays you interest. CDs, though, are for a set time period. They pay a little bit more in interest than a savings account, but you generally can’t access the money during that time period without losing some of the interest. For example if you by a 1 year CD you might get 1% interest. If you don’t touch that money for the full year you will get the full interest. If you pull the money out early you may lose some of that interest in an early withdrawal fee. So the trade-off is higher interest, but less access to your money.

I recommend get a CD after you have you savings account fully funded and you have extra money that you want to save. Or if you want to save money for a purchase and want to make more in interest before buying.

  1. Credit Cards.

Credit cards are very powerful. They can be very dangerous if you don’t use them properly, but they can also make buying things cheaper. They also can build your credit. This means that if you use them responsibly they can make it easier to get a loan later. That loan may be cheaper if you show that you have a track record of paying you bills on time.

I recommend that you not get a credit card until you don’t need one. Your finances are under control and you don’t spend more than you make. Then use the credit card for expenses and pay it off every month. This way you can earn cash back points that will actually be valuable. Remember, cash back on a credit card isn’t valuable unless you pay the credit card off in full at the end of each month. Credit cards can also make purchase online easier and safer. Another benefit of credit cards is that they typically come with buyer protection.

The exception is true emergencies. Getting a card for emergencies can be wise, but only if you don’t use it for anything else. If you have a tendency to buy things you don’t need on a credit card that you can’t afford to pay off at the end of the month then you shouldn’t get a credit card. If you feel you need one for true emergencies, like breaking down in the middle of nowhere on vacation, then make sure you can’t use it when you don’t need it. For example, put it in a block of ice in the freezer until you’re going on that road trip.

  1. Brokerage Account.

This is a more advanced topic. A brokerage account will allow you to buy stocks and mutual funds. This can be a great way to store and gain wealth. It can also be a great way to lose everything. Before starting investing learn to research companies and investments.

I recommend opening a brokerage account when you have a fully funded emergency fund. Also, be ready and willing to read financial plans and prospectuses. You’ll want to understand what you’re investing in and how they will make you money before risking your own hard earned dollars.

And A Half. Savings Account 2.

I recommend having a second savings account. Work to get to one month’s worth of expenses saved up in the first one. So if you spend $2000 a month on housing, utilities, food, transportation, etc then save up until you have $2000 in your first savings account. Then open a second savings account. I recommend using an online bank for the second one. They usually pay higher interest and it’s a little harder to access the money. This second savings account will be your emergency fund. Put whatever helps you sleep at night here. Most financial experts recommend you have enough money to cover 3 to 6 months’ worth of expenses. Some recommend enough to cover a year or more. This is the money you’ll use if you lose your job and can’t find one for a few months. So make sure it has enough to cover however long you think it’ll take you to find another job if yours disappeared unexpectedly. Between my first savings account and my second one I like to have 6 months of expenses saved up. That way if I lost my job I would have 6 months to find a new one. Most likely I could find a new one within six months. As we saw during the 2008 recession sometimes it takes longer.

You may consider opening other savings accounts for different goals. Maybe a savings account just for vacation. Or one to pay for gifts. That way you can save up for these things instead of putting them on a credit card and paying interest.

 

Are there other accounts that you would consider key accounts? How do you see these accounts?

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