Banking today looks drastically different than it did five or 10 years ago. Technology has replaced the image of brick and mortar banks with apps and logins. This shifting of location from the street corner to the pocket has created a host of new opportunities to streamline and strengthen your bank account. Let's explore the basics.
Checking Accounts
It all starts with your checking account. Think of your checking account as central station for your money. This is where your money first arrives and where it departs. Checking accounts are basic. A best practice is to keep your checking balance from growing too large. Below are a few reasons as to why keeping a minimal balance in your checking account is prudent.
1. You Earn Zero Percent Interest
One might argue that the point of a checking account is not to earn money, but to spend money. While this is technically correct, one should not ignore the importance of earning extra interest. You can only take money out of a savings account a maximum of six times per month, compared to an unlimited amount of times for checking accounts. Due to this, savings accounts pay you higher interest rates. This means your money grows without you having to lift a finger.
2. Reinforces Spending Discipline
With a checking account and debit card, you cannot spend more money than you have. Once you disable overdraft protection, your card will get rejected if you do not have sufficient funds in your account. This prevents you from going into debt. It also emphasizes the need to plan. However, the goal and plan is never to have insufficient funds in your account. It is never fun to have your card rejected (I know), but at the end of the day it is better than the alternative. Maintaining a small checking balance is more of a mental check that promotes mindfulness when spending.
3. Savings In Checking Account = No Savings
It is next to impossible to keep your savings money and your checking money in the same account and have there be no overlap. While theoretically it is possible to do it, the probability that you remember the exact amount you have allocated to savings and spending is essentially zero.
So how much should you keep in your checking account?
While there is no hard and fast rule, I prefer to keep one and a half months worth of expenses in my checking account and everything else in specific savings accounts. This provides enough cushion to know that I will have plenty of money to support myself throughout the month. I know there is no risk of insufficient funds and I am not inadvertently neglecting my savings. How do you know what one and a half months worth of expenses is? Don’t worry; we will be covering that in depth in future blog posts.
Savings Accounts
Traditionally, most people keep their savings account at the same bank as their checking account. Today, thanks to cost-cutting technology, online savings banks are more prevalent than ever (not the same thing as your normal bank's website). Here are a few reasons why you should consider switching to an online savings account.
1. Better Yield
Interest rates are low, and all signs point to them staying below historic averages in the foreseeable years. Due to this, traditional savings accounts yield only about 0.01 percent, whereas online savings banks can yield upwards of 1.05 percent. The reason for this difference is because online savings do not have to operate physical locations, which is expensive. This 1-percent difference doesn’t seem all that striking, but the key thing to remember is that any yield is better than no yield.
2. Less Tempting
Keeping your savings online makes it much less likely that you will abuse them. The separation makes it less tempting to instantly transfer money from your savings account to your checking account. This is especially useful after those nights out with friends featuring too many rounds of $12 drinks … and queso.
3. Specific Accounts:
With most online banks, you can set up multiple accounts with different names for savings toward different goals. This further separates important things, such as your emergency fund, from your vacation fund, from your season tickets fund. This distinction makes saving easier since you know exactly how much you have set toward your specific goals. It also prevents the rationalization of cannibalizing some of your savings for a different purpose, keeping you on the right track toward your goals.
So what did we learn today?
1. Checking accounts do not help you earn money.
2. Keeping only one-and-a-half months worth of expenses in your checking account can help you reach your savings goals faster.
3. When in doubt, save at an online bank.
