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How I Use My Bank Accounts: A Three-Tiered Approach
Previously, I discussed my current method for following through with a budget . In that post, I mentioned that automating as much of my finances as possible is the most effective thing I do to keep on track financially. I’d like to expound on that by detailing our current set of bank accounts and the purpose of each account. In general terms, we use three separate accounts to handle the bulk of our bill paying and saving, a checking account, a large-purchase account, and an emergency fund.
Checking Account
Our checking account is the primary account of this system. It is the gateway for all of our finances. Almost all of our incoming money is dropped into this account and almost all of our outflows are pulled from it. It is an account at a brick and mortar bank with a local branch so that I can withdraw cash, cash checks, and deposit money easily. Both my and my wife’s paychecks get direct deposited into this account. We use the free bill pay feature to pay as many bills as possible (I LOVE not having to mail all those bills out!). We even arrange most of our charitable contributions through bill pay as scheduled payments that are sent out by the bank each month (it’s not quite like using the "automated tithing machine," but it’s close I guess). Our mortgage payment and some others are automatically debited from this account as well. Again, the overriding principle is to automate as much of our inflows and outflows as possible.
Large-purchase Money Market Account
We also have a money market account hosted at same bank as checking account for convenience and same day transfers back to the checking account. This money market account is not the emergency fund (and contains a lot less money than the emergency fund). Rather, it acts as the buffer between the checking account and the emergency fund. The main goal of this fund is to be available when a large purchase is made or a big bill comes in that the checking account can not absorb. In that case, I transfer some money from this account back to the checking account. This allows me to maintain less money in the very low-interest checking account while not using the emergency fund for expenses that are not strictly "emergencies." I then replenish this account back to its targeted level.
Emergency Fund & Subaccounts
Even though the large purchase fund earns more interest than the checking account, it still earns much less than the emergency fund I have at EmigrantDirect.com . The Emigrant account is currently earning 3% which is about what the other popular online accounts are earning. Though I think INGDirect is more popular among personal finance blogs (maybe at least partially because of their generous affiliate program?) (Emigrant has an affiliate program but they won’t let me in it for some reason), I’m very happy with my emigrant account. It offers free transfers to and from the account, a pretty good interest rate, good email and phone support (the affiliate program emails notwithstanding), and a really useful sub-accounts feature.
I have setup a number of sub-accounts for short-term savings goals:
- Emergency fund – This is our cash reserve we use to try to help weather significant financial storms
- Vacation fund – This used to be our student loan payoff fund, and we very intentionally changed it to our vacation fund after paying off the last student loan .
- Yearly expense fund – We put money into this fund for bills like life insurance, household employee taxes, etc that are fairly large and only paid once (or a few times) a year.
- Home purchases fund – The money in this fund is earmarked furniture purchases, home improvement projects, etc.
- Charity fund – Though my income is very consistent, I do get bonuses from time to time. To ensure that we give the decided-upon percentage of our income, whenever we receive extra income, I transfer the appropriate percentage into this fund. I feel this is a very easy way to keep track of the money and save it up for big donations as needed.
Again, as I said, I automate as much of this as possible. So, I schedule monthly transfers from my checking account to each of these sub-account funds.
So why so many accounts?
I use these multiple accounts to provide protection now and to plan for the future. The three main accounts of the checking account, large purchase fund, and emergency fund provide a layered system to (hopefully) avoid having to go into debt for major purchase and/or emergencies. And the automated transfers to the other funds help me to plan for the future to be able to pay our big bills and simultaneously enable us to do things like vacations and home improvements, again, without going into debt.
Having all the funds seems a little onerous, but it’s not that bad. Of course, you have to remember that my philosophy is to do everything as simply as possible. That means that I find it very worthwhile to take extra time to set something up if it means that the ongoing maintenance of it will be very simple as a result of the upfront work.
Related Posts:- Is all this Technology Good or Bad for my Finances?
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- Where should you keep your Emergency Fund?
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I use ING for checking and have at least 10 sub accounts(savings). I personally use ING, because it is the best bank around for my needs. Even the checking gets a reasonable interest rate and free online paper checks. I can’t say enough about how simple ING has made my finance system.
I have sub accounts for property taxes, auto insurance, car replacement, anything I need. I transfer money in each paycheck or at the end of the month. Transfers are instant and I can instantly have the money in my check to make a payment. Interest on everything and great customer service Just love it.
@THR – yeah, Emigrant does not offer a checking account (forgot about that at ING). Personally, I don’t think I’d be ready to give up my local checking account yet anyway.
I really like the sub-account feature as well. I have used emigrant for a while and was just about to switch to ING solely because of the sub-account feature. So, I fired off an email to emigrant and they showed me how to do it so I stayed. Now why won’t they let me into the affiliate program…..?
I have been ribbed for using multiple bank accounts most of my life. Most of my money comes from PayPal or online transfers and every time I get a payment I split it up….$20.00 to primary checking, $5.00 to savings account used to deposit in the Roth IRA, $10.00 to savings account used to deposit to day trading account, etc. Hey, it guarantees everything gets budgeted, makes me live within my means and the accounts are all free!
Great post!
Ray The Money Man´s latest blog post…How Many Times Do I Have To Say It, You Have To Have A Plan