My financial spring cleaning happens early in the year as I prepare to file taxes. I usually go through my folder containing various documents I’ve accumulated for tax time. If you’re like me, you’re not perfectly organized either. In fact, after reading about the various accounts you need for financial fitness, you might think, “You talk about all these different accounts… What’s the simplest version I can assemble of that?” Today’s blog brings everything together so you can keep your financials in order.
Now is the time to organize and simplify. Why be bogged down in old paperwork and dormant accounts? You might have accounts you opened for a special purpose and forgot about or accounts you used before moving to a different city. You could have old 401(k) accounts from previous employers and investment accounts with various brokers. Let’s look at the easiest way to get organized!
Two Types of Accounts
You can categorize your accounts as either cash-flow accounts or saving and investing accounts. Cash-flow accounts are needed either for frequent access or as a 911 emergency fund. Saving and investing accounts involve money you won’t be touching for a long period of time.
Your needs are different with each type of account. When opening cash-flow accounts, look for convenience and low fees. Because the money isn’t parked for a long time, interest rates aren’t top priority. You can try squeezing out that extra .5% interest, but it’s not worth sacrificing convenience. A local bank or credit union where you can go in person is ideal, and online access helps.
Saving and investing accounts are different. You need good investment options—including index mutual funds and ETFs—and minimal expenses. Service is more important than convenience, because you don’t need a local branch. Look for high returns combined with low fees. Every percentage point of interest is significant.
Cash-Flow Accounts
Here’s a list of cash-flow accounts that help you reach and maintain financial fitness. Though credit card accounts represent cash flow, they’ll be covered in a later blog, and you only need one—or none!
- Spending account: You use this checking account to pay bills and expenses each month.
- Income account: This is a savings account where you deposit your paychecks. Automatically transfer your monthly “allowance” to your spending account as I’ve described in my uneven cash-flow blog.
- Purpose-goal account: Use a savings account for accumulating money toward your short-term purpose goal.
- A 911 Fund account: This is your emergency fund containing three to six months of expenses. Use an FDIC-insured savings account with a good interest rate, and remember quick access is of primary importance.
Saving and Investing Accounts
If possible, choose a single investment company for the saving and investing accounts listed here. The exception is a 401(k) or 403(b) account, because your employer picks the custodian.
- A 401(k) or 403(b) account: This should be your current employer’s retirement plan. Contribute enough to get the employer match if one is offered.
- Roth IRA: If you qualify, this is usually your first choice for easy investing for financial freedom. That’s after getting any 401(k) employer match.
- IRA rollover account: If you have a 401(k) with a previous employer, roll it over immediately. You only need one IRA rollover account for all plans you’re rolling over.
- Educational investment account: If you’re saving for your child’s college education, open a 529 education account. You only need one regardless of the number of children you have, and it’s a great place for cash gifts from the grandparents.
- Other investments: To save for additional long-term goals, you may need a regular investment account, sometimes called a brokerage account. You need just one of these. If your goal is less than five years away, save the money instead of investing it.
Simple but Practical Financials
My simple saving blog helps you decide where to put your money first. It would be nice to simplify everything to the point of having only one or two accounts. However, to take advantage of tax savings and the mental accounting that comes with separating money according to its purpose, you’re best off with categories like I’ve outlined here. This strategy balances simplicity with sensibility.