Money Basics Series: Types of Accounts You Need
There’s a lot of financial advice out there. It can be super confusing to figure out when something applies to you, or what you should be doing. Even when well informed, I find people still often question whether they’re doing enough of the right things with their money. To that end, I’ve created a list of a few types of accounts that I think everyone should have:
Checking: This is your general bill paying/direct deposit account. You should only keep about 1 month’s worth of expenses in here. Keeping too much cash in checking can often lead to overspending because seeing a big balance can make you feel like you should spend more.
Savings Account #1: This is for your emergency fund(3-6 months of expenses). Ideally, you should keep this money in a high-yield savings account so it can earn a bit of interest since it should always be in cash. Be sure to keep it at a different bank thank the one you use for your checking needs so you remove temptation to transfer from savings back to checking.
Savings Account #2: This is the home for all goals that are happening in <3 years. Even though it can be painful to see large balances sitting in cash for an extended period of time, it’s not as painful as approaching the time you’ll need to tap into savings and seeing your investments are down 15%. Play it safe and keep these in cash until you need the money. Keep this in a high yield savings account or CD’s that will mature in time to earn a bit of interest.
401(k) or IRA: Retirement needs to be one of your non-negotiable financial priorities. By saving throughout your career, no matter what, you set yourself up to be financially sound over the entirety of your life.
Be sure not to get so caught up in the details here and not take action. It’s not really that important whether you choose traditional or Roth for your 401(k) or IRA at first. What’s really important is you’re putting at least 10% of your income away for retirement. The sooner you adopt that habit, the better!
General investment account: Here’s where you set yourself up to be the rich auntie who gives the best presents and is always travelling. This is a taxable brokerage account you can open which allows you to invest in stocks, ETFs, bonds, mutual funds, etc. You should consider this your general “wealth-building” account. It may have a specific purpose, like a long-term (>5 years) purchase goal, or may just be where you throw all your extra cash flow that isn’t dedicated to anything specific.
I hope this was all helpful for you, and gives you some concrete actions to take towards getting your finances in order(or realizing you already have them in order!). Reach out and let me know if I can help.