- Personal Finance
How to Save Money Organizing Your Bank Accounts
Step 1: The Reason, The Start
How to save money organizing your bank accounts, yes more than one!
Having worked at a couple banks, I experienced on a daily basis customers having their accounts hacked and abused without authorization, accounts freezing due to sudden odd charges and are unable to be used, fees from overdrafts or regular account monthly fees and many other situations that caused customers to not make purchases or use their accounts when they needed them most. I was a business banker specifically, and many small businesses had 1 checking account that they operated everything out of, and had all their capital in. if something happened to that account, they couldn’t pay bills, employees or vendors, creating havoc!
During my time as a banker I developed recommendations that will not eliminate all the issues, because you cannot help if someone gains access to your account or charges you multiple times for the same purchase, but my recommendations will give you options and maintain your ability to make purchases or operate every other area of your business(and your home).
Below is exactly how I have my family’s bank accounts set up, and why I decided to do it that way. Again I learned that wisdom is learning from other peoples experience, and I heard hundreds of stories working at banks and did not want that to happen to me.
I will describe each account, what its purposes are for and not for, some tips with each account. Then I will give some general tips about checking accounts, savings accounts, check cards and credit cards that are all used in my account set up. Finally I will place a picture overview of my account set up.
This system will not only keep your funds secure, but you will also earn more interest, spend less, save more, and have a purpose for your income and expenses.
if you want to implement this great strategy, you do not need to close all your accounts and start from scratch. Just start reorganizing them. it may take some time to change direct deposit accounts, change bills and auto payment transactions, but it will be worth it, I promise.
Direct Deposit account- This is a savings account. This account receives all of your income, or at least your direct deposit funds from your main source of income. You do not give this account number to anyone except employers who deposit funds into it. You do not have a check card for this account, or write checks from it. The only purpose is to harbor all your income and then disperse only what is needed into other accounts. This account should grow, and if it does, you are taking in more than you are spending, which is all you can ask for to start. More on what to do with these extra funds as they build later.
Why a savings account? This is a form of paying yourself first. Instead of forcing yourself to save and transfer money too a savings account, we are going to do it automatically, and transfer the money we need to spend out of it, again hopefully after each month there is something left over. This is automated savings, it is not necessarily active savings, where you are taking a certain percentage or amount and saving it somewhere else, but it is passive and you are saving without doing anything else, all by reorganizing how your accounts function. Another reason is interest, as your money sits in the savings account it is earning some interest. Then the left over funds each month that build over time gain interest, and then interest gains interest, the faster you can get compound interest working for you the better off you will be.
Lastly, as I stated in the beginning, is security. The odds of something happening to this account is very small. Since the only outside people that have this account number are putting funds into your account, and you are only making internal transfers to other internal accounts in your bank account system (to come later), no one will have access to your account. you are beginning to diversify your money, much like stocks and investments, to minimize risk.
the Photo is a drawing of our bank account system. As you read on this photo will have additions to it as we learn more about the complete system.
When you continue reading, keep in mind the purpose we are giving your money, and how having a purpose accelerates our goals.
Next up, The Bill Pay Account
Bill Pay Account
Bill Pay Account. This is a checking account you will use to pay ALL of your bills. From rent, to credit card to utilities and cell phone. My recommendation is to use this account for anything that is about the same and paid every month, gym membership, energy bills, cable and internet. Anything that can be automatically taken from this account each month can be categorized here.
Once you know about the monthly total, set up an automatic transfer from your direct deposit to your bill pay account to pay your bills each month, keep a little cushion in this account in case a bill is higher than normal, the key to this system is to save money, not spend it on overdraft fees.
Most banks have bill pay set up and I recommend using this for a number of reasons, again from my banking experience. If you are resistant to internet bill pay because you think it is unsafe or do not trust it, let me present this scenario. Your bill is due on the 15th, so you mail a check that has your name, address, maybe phone number, bank account number and routing number on the check to your energy company. If anyone gets a hold of that letter, there is nothing more anyone would need that isn’t already on that check to do damage to your account. The second reason is the mail itself, if there is a delay and your bill is late, it is you who pays the late charge that most companies will gladly charge. If the check never makes it to its destination, you have no idea where it is, where it went, and what is being done with it. So now you are going to mail another check, doing the same thing that got the first check lost? The bottom line for me is that this action of mailing bill payments is all the responsibility is on ME to make sure my bill is paid on time.
Now if you set up automatic bill pay here is what happens. It is either electronically paid through the bank, and there is never a chance of it being late, or your bank mails a check from their general account, keeping your account information safe then they send the check with your name and energy account number on it, so your energy company never has your account information, nor does anyone else who may get a hold of the check which is the banks problem not yours. Now if your payment is late or never made, you call your bank and they fix it, because the burden is on them, including any late charge your energy company charges you. I used to reimburse late fees for bill pays that did not make it there when the bank promised to have it paid by a certain date all the time. Lastly, if you set it up this way, it is automated, you do not even have to think about paying your bill if you chose, or it takes the click of a couple buttons to send the payment, saving you time and at least a stamp!
You can still choose to get paper statements from your energy company, and I will check my payments every couple months just to make sure everything is still doing what it should, but now I do not have to do anything and I know that it is paid, or it will not be my fault if it is not.
I hardly ever write checks any more. I might write 5-10 a year. Any chance I get I use my bank to mail a check to a person or pay a bill. Other than that I use my credit card(future Stewardology article coming on the credit card float) or check card. I do carry a blank check in my wallet and some cash as an emergency, but those are far down the list.
A couple recommendations with bill pay. Keep a cushion in this account, you do not want any fees. Automate if you can, remember time is money. Also, let the burden be on the bank not on you. Lastly, even if your bill is due on the 15th, and your bank promises it will be paid on the 15th if you send it on the 13th, send it a couple days early, just in case, there is no need to cut it close, you do not save any money, so pay the bill early and remain in good standing with your energy company.
Lastly, if you chose, and I recommend, have a check card for this account, and keep it in a safe place. If you want to have a book of checks for this account, do that too. That way, if anything happens to your other accounts (explained in upcoming segments) you can use this account while the other account is being corrected, shut down, or opening a new one. Notice you will use this account and not your direct deposit savings account, we want to keep that safe, and want other accounts to take the risk of tampering, but not that one.
To recap, your bill pay account is a checking account, having an automatic transfer from your direct deposit savings account to this account to cover all your bills, with a little left over just in case. Have a check card and checks ready for this account, but utilize the bill pay function as much as possible to automate and take the risk off of you.
You can begin to see that by having this money set aside in specific account each month, a budget begins to form, and you will see a purpose for your dollars. that is one of the goals of this set up, is to give purpose to all of your dollars instead of it all being lumped into one account. it will take a couple months to figure out exactly how much to have transferred into the bill pay account, and to get all the automated payments set up that you can, but it is well worth it. Once it is all set up, it is almost completely on autopilot. personally I keep about an extra months bills in the account just in case.
Keep in mind most of this information is a recommendation, so feel free to customize it for your comfort and lifestyle. As long as the basic concepts are in place, you are on your way to a better financial future that is easier, automated, and making you money to reach your goals.
Next up: Emergency Fund Savings Account.
The Emergency Savings Account
Emergency Fund Account- This is a savings account.If you do not have your emergency account where you would like or one at all, it is generally suggested to have two to three months of income or my preference three months of living expenses in it. The thought behind this amount goes very deep and there is an ongoing debate as to what amount and why. Know that again like most things in finance, there is a preference and comfort element or emotional side that needs to be considered, or anything you try to implement will not work. There is no one size fits all, but like I have said in other articles and segments, there are some general guidelines to follow, then customize it to your preferences, goals and comforts. You do not want too much money in this account, because you will not be using this money except as a backup, or emergency, by having too much in the account, the money is not being properly utilized in other areas. If there is not enough money, you will be under prepared, and an emergency could wipe out your account and many others, which is what this account is supposed to prevent. My thinking with three months of expenses is that if there is a loss of job, you have 3 months to get back on your feet before any lifestyle change is needed. This amount is easily calculated and can be the start of a budget, if you already have one, then multiply your monthly expenses by three and you have your goal for your emergency fund account.
Why a savings account? Simple, you will not regularly use this account, in fact, once it is complete, it will sit, and go mostly untouched. With a savings account, it is gaining interest, and hopefully more than it would in a checking account.
The Emergency Fund Savings Account should be the VERY FIRST thing you complete before you do any type of saving or investing or pretty much anything else with the exception of a few things, which I will outline in a future article. But besides matching your employer’s 401k contributions, being adequately insured, paying all your bills on time and maybe a few other exceptions, you should be putting all of your extra dollars in this account until your goal is met.
Now, determine what your goal is for your emergency fund, and set up an automatic transfer from your direct deposit to this emergency account. Set up the transfer for an amount that has all the access funds from your direct deposit account going into it until the amount is reached, then you can stop funding it all together.
I cannot emphasis enough how important it is to get this account fully funded as soon as possible. Once it is where it should be, stop the transfers and let it sit. Do not touch it for any reason other than an emergency. Do not use it to purchase a new car or for Christmas gifts. The emergency is a sudden trip to the emergency room, or the purchase of a new furnace that is not in the budget, or a new transmission that is not affordable. Your emergency fund should be liquid, meaning easy to get to in a couple days. Again, I go into detail about the emergency fund here, but for the sake of this article, your emergency fund is a savings account that you have access to withdraw your funds as soon as you are able to get to the bank, or transfer it to a checking account for use instantly.
Once your emergency is at the level it should be, you have some options. If you want to place your emergency fund in a no load mutual fund, go for it, mine is. A no load mutual fund has no fees, and may outpace your savings account as far as returns are concerned. By doing this, your emergency fund is performing double duty, both as a backup, and as an investment. Just be aware, you may give up a little liquidity if you do this, as it may take up to a week to have full access to the funds in a mutual fund.
To recap, your emergency fund is a savings account. Try to fully fund this account as fast as you can with three months of expenses. Once it is fully funded, stop all transfers, and do not use it for anything but a serious, unplanned, unexpected emergency.
Lastly, take note again how we are giving your dollars purpose. You may have enough funds in your checking account for a fully funded emergency fund, but by it being in a separate account for a reason, you have a milestone, an accomplishment, and a go to or backup in case something happens.
Next up. General Use checking account.
General Use Account
General use checking account- This is a checking account used for every day purchases. Buying lunch, maybe even filling up the car, buying a new shirt or even grocery shopping. I basically determine what is use for this account by what I can use my check card to pay for. Which is the next step, have a check card for this account, along with a book of checks. Even if you use one more than the other, if you lose one, you will have the other source at home ready to use in the mean time your card is being replaced.
Now set up an automatic transfer from your direct deposit account to your general account with enough money to on average cover your expenses each month. This may take some adjusting, but again I recommend having a cushion in this account so you do not spend more than you have.
The main reason for this account is to separate your vital accounts, and your income from having exposure to all the purchases you make. by having this separation, if your general use account becomes compromised, it is not going to hard any of your other accounts, leaving your income and bills unaffected and able to still operate without interruption.
another reason for this account is you can begin to customize it and give your self an allowance. maybe this account is for all of your extra expenses, and not your main needs like groceries and gas. if you decide to use this account for a slush fund, you can only have it transfer a small amount, and once it is gone you are done spending for the month, or week, however you wish to set it up. the bottom line is again, like the other accounts, giving this money a specific purpose, because when it has purpose, you do not miss it, and it is better allocated for its use.
The only way you can optimize this account is if you play the credit card float, which I explain in another article of mine. If you do that, one of your credit cards (how many should I have? another article) will be used to pay for all of them, then automatically paid for by your bill pay account to pay the balance in full. I do this to collect the points from the rewards the credit card offers, also my money stays in my savings account longer earning interest, as I am borrowing the credit card company's money at no charge until I pay my bill in full, again paying no interest. This is something that takes discipline, but can be rewarding if done correctly.
The picture below shows our account set up so far.
Next up: Your Investing/Saving Account.
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