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?

You Can Only Save So Much.

One of the most common bits of money advice is to save more. The idea is that you create a budget and cut all the fun stuff out. Then you save what you have left over. That all sounds great. Especially if you make $100,000 a year and have no kids. Yup, then you could cut your spending from $100,000 to $50,000 and save $50,000 per year. That’s a lot of money, but it’s still limited to what you make minus what you spend. It can never be higher than what you make.

 

Now, what about those of us who only make $50,000 a year and have a family to support. Turns out that that’s most of us. The average pay in the US is about $50,000 a year for a couple. And the couple has kids. You still need to eat. You still need to buy clothes for you kids. Even if you cut that down to the bare bone and spend nothing on luxuries you only have a few thousand per year to save. According to the Department of Labor the average household spends about $3000 on things like entertainment and gifts. The other roughly $47,000 is spent on essentials like food, shelter and medical expenses. Everybody’s situation is different, but this will definitely make it harder to save.

 

So what do we do? This is why rule number 2 of my Three Money Rules is so important. Maybe more important than the first rule. We need to start making more money. That’s easier said than done, though. Start small. Put a little bit of money is a savings account. That will earn a little bit of interest. I would recommend an online savings account since they pay much more interest than a regular bank. You can check a website like bankrate.com to see what different banks are paying.

 

That will help build a foundation, but it won’t make you rich. For that you’ll need to bring in more money. Get a second job, create a product to sell, volunteer for a service, or start your own business. The next thing is to put that savings to work. Since you can only save so much money you need to make sure that what you save is helping you generate more money. Again start with a savings account. After that start looking at other places to put your money. For example, buy things at a thrift shop to resell on eBay for more money. You can find valuable things there that are sold for pennies. Bonds can give you a better return than a savings account. Another option is to buy stocks. Dividend paying stocks of big companies like Coca-Cola and Johnson & Johnson can be a good option. Check out my growing post “Way too Many Ways to Make More Money” for ideas on how to increase your income.

If Money is Important then Make it a Priority.

There’s an old saying that I haven’t found the original source to. It goes something like this: “Show me a man’s calendar and his checkbook and I’ll tell you what his priorities are.” Though Gandhi may have said it easier when he said “action expresses priorities.” However you express it, you’re saying that it doesn’t matter what people say is important to them. People spend their money and their time on what actually is important to them.

 

So what does this have to do with money and retirement? Studies have found that more than 90% of people know that they should save more money for the future. Unfortunately most people don’t save much money. The average person in the US on saves about 5.20%. This means people are barely saving any money even though they all know better. So why is that? Priorities. If you want a secure future. If you want to pay off debts and eventually fund a retirement then you have to make it a priority. It doesn’t work if you just say saving is important then spend your money on things that aren’t important.

 

What’s stopping you from making savings a priority?

The most common reasons say people say that they can’t save is that they don’t have enough income, they have too many bills, and too many obligations. You do have certain things that you have to spend money on. You also are limited by the amount you make (not really, but that’s the subject of another post). You also have obligations to your kids and others. But are these things truly requirements or are they self-imposed? Look at them to see. If your future is a priority you can make it work.

 

What does it mean to have a priority?

At the simplest level, if something is a priority then you will make sure it happens. You will put that goal above other, less important things. If something is a priority you will sacrifice the unimportant things to make it happen. Once you have saving and your financial future as a priority you can use that to help make decisions about money.

 

How to set a priority or goal.

To set a priority you need to set a goal. These should be written down. So grab paper and start writing out your goals. For each goal write what you will accomplish, when you will do it, and how you will do it. For example, “Pay off my credit card within 2 years by putting an extra 200 per month to the bill each month and not charging more on the card.” Do this for anything that you want to accomplish. If you have more goals than time or money you may need to rank them. If you put them in order of importance now while you’re not faced with a question it can be easier to make a rational decision. Then when you’re faced with a situation you can look at your goals to help you decide if it’s worth it.

 

I recommend writing down any other priorities that you have. Writing down your goals helps make them real. Giving yourself a deadline helps keep you focused. Saying how you’ll do it will give you an actionable plan. Without these things it’s just a dream not a goal.

 

Make it a priority.

Make these goals a priority. Instead of buying something that you don’t really need, like going out to eat lunch when you could bring your lunch to work, think about your goal. Taking your lunch is cheaper and will make it easier to put the extra money towards your credit card. When faced with a decision like this consciously decide which is more important, your goal or what you’re about to do. You can do this with any decision that affects your goal. If what you’re about to do is more important to you then go ahead, but keep in mind you may be sacrificing your goal to do it.

 

If you want to have financial freedom, or even if you just want a little extra cash in your account at the end of the month you have to make that a priority. When faced with a decision look at the priorities and goals that you wrote down. Does the decision help you reach your goals or does it take you further away from them. Use that you help you make the right decisions.

 

Have you set financial goals? How are they work for you?