Do you have the right accounts?
and a little about optimization vs satisficing
We have a joint checking account, a savings account, and a high-yield savings account. Then there's our dependent care FSA and the HSA. I have a Target debit card that I signed up to get $80 off in-store and $80 off online a couple of years ago. I have a checking account I opened for the bonus that has $0.12 in it currently (but at least it doesn’t have any fees!). And that doesn’t even go into the credit cards (we have 10 between us).
We both have employer-sponsored retirement accounts (mine is from my previous employer). I have a Roth IRA, and we have a brokerage account that I put $500 in a couple of years ago but really has no business existing. Our kids both have 529 plans started by their great-grandmother.
Are these the right accounts? Are they at the right places?
I haven’t had some grand strategy about what accounts or companies to use. Rather, much of this has come about because of my short-term optimization or happenstance.
Our brokerage is just the one our employers use(d). I subsequently set up a Roth IRA and 529s at the same one. I’ve had the same checking account since college when it was the bank within walking distance. Those ten credit cards have mostly been opened for the express purpose of getting a bonus.
Fortunately, as I’ve accumulated accounts, I’ve been intentional about features and fees. I’ve thought about the bonus, but I've also thought about the long-term plan. We’ve ended up in a place that isn’t perfect but serves our needs. I could spend more time finding ‘optimal’ accounts, but for now, we’re satisficing.
If you aren’t like me and don’t think about your financial accounts way too much, here are the accounts you might need and a few things to think about in determining if you have the right accounts -
Accounts for everyday expenses (the next month or so)
To me, this means a checking account and a handful of credit cards.
Personal checking account
This should be an account at an FDIC-insured bank or NCUA-insured credit union. Don’t keep cash in Venmo, Cash App, PayPal, or whatever the newest iteration of payment apps are. They are not insured. If the platform fails, your money could be lost. If an insured bank fails, the federal government steps in, and you get your money back.
If you value having a bank you can walk into, put your checking account there.
You shouldn’t be paying fees on your checking account; plenty of great fee-free options exist.
I want to move our checking account to a local credit union once we have a more permanent home. “Like other financial institutions, a credit union accepts deposits and makes loans, but we are not in business to make a profit. Most banks and savings and loans are owned by a group of stockholders whose interests include earning a healthy return on their investments. In contrast, credit unions are not-for-profit cooperative financial institutions owned by their members.“ - SECU
3-5 credit cards
Credit cards offer protections that debit cards don’t and build your credit.
One of these should be your oldest card. Part of your credit score is determined by the length of your credit history, and closing or having your oldest card closed due to inactivity can have a negative impact on your credit score.
As a couple, we each have a credit card that we use for our own ‘fun’ money and a separate card for shared expenses.
Business checking account/credit card(s)
Even if you’re running a Depop shop and making a few thousand dollars a year, keeping your business expenses separate is a good idea!
Account for short-term savings (< 5 years)
If you need the money soon - it shouldn’t be invested in something that could lose value. But there’s no reason you shouldn’t make a little money off of it!
High-yield savings account (HYSA)
If you don’t have a high-yield savings account (HYSA), open one! Many are free, and they are great! I have a client who is projected to get over $700 out of their HYSA this year just because they are keeping their emergency fund and their savings for their wedding next year in it!
Your savings account should be at a different institution than your checking account (this earmarks it more specifically for saving).
Be aware of the limits of FDIC and NCUA insurance. You have surpassed the coverage limits if you have more than $250,000 per individual in a bank account. You should also evaluate how much cash you hold and consider investing some of it if you hit these limits!
Account(s) for medium-term and/or special purposes
Consider a 529 account if you are saving for someone’s education and want to do it in a tax-advantaged way.
ABLE accounts are outstanding for those with disabilities and don’t affect eligibility for most benefits programs.
Flexible spending accounts (FSA) come in two flavors. One is for medical expenses. The other is for dependent care expenses. Both are pre-tax and are to be used within a calendar year. If you pay these expenses, these accounts can save you a significant amount in taxes.
Health savings accounts (HSAs) are similar to medical FSAs, except they do not have to be used within a calendar year. You can even invest funds within HSAs. They are especially good for saving for retirement health care expenses.
Accounts for long-term investing
You probably should have pre-tax, after-tax, and taxable accounts in the long run.
Pre-tax retirement accounts (401k, 403b, Traditional IRA) can help reduce the taxes you pay today. Employer-sponsored accounts with a match are an easy button for long-term investing (you are already getting a great return by just getting the match!)
After-tax (Roth) retirement accounts (Roth IRA, Roth 401k) mean tax-free money in the future. The Roth IRA is also more versatile than you might know!
A taxable brokerage account doesn’t limit how much you can invest or when you can access the money.
Use a SIPC-insured institution for your investments. While you’ll never be protected from losing money because the stock, coin, or fund you bought went down in value, you will be protected from the actual institution going under. Check that your brokerage is part of SIPC. While some argue that if major brokerages go under, there will be bigger problems, I think there is no reason not to protect yourself and utilize the available insurance.
What accounts do you have? Are there ones that I left out that you find useful?
Need to simplify your accounts? I loved this article about the motivation for simplification and how Andre is approaching it.
