There are at least six accounts every family needs to have. Of course, most people have one or perhaps two accounts. However, that isn’t enough.
If you have a checking and a savings account, then you are on the right track, but you need to do more. In fact, you should look at having at least four more accounts.
Six accounts? Are you serious?
Yes. Yes I am.
Now, before you think I am crazy, allow me to explain why. It has to do with helping you better budget and track your money. We do this for our family and it is great. We know which account pays which expenses.
You may think that you need to have a lot of cash in order to do this. However, that is not even remotely true. In fact, it may even help you with your finances more if you are struggling to make ends meet.
WHAT IS THE LOGIC BEHIND THIS?
Look at it like this. Let’s say you own 20 pair of socks and they are all different colors. Instead of folding them and putting them into your drawer, you toss them into a big pile. The morning comes and you need socks. However, you need to find the blue socks.
You have to search through a huge pile of socks to try to locate the ones you need. You will, of course, find them. However, it may take you longer to do and you may get frustrated in the process.
Now, if those socks were all folded and organized, you would open the drawer and instantly find your blue socks. No stress. No worry.
The same concept is true for your money. If you know which account is for emergencies only and which pays the mortgage. This is a simple system which helps you organize your money.
WILL THIS COST ME MONEY?
Some of you may think that it will cost you money to have more accounts. That may be true if you do not maintain a minimum balance. However, in many cases, additional accounts are free. Your bank will also allow you to open several of them (and if they don’t, it may be time to look into getting a new bank).
Before you run down to your local bank or credit union, let me share the types of accounts you need to have.
THE SIX TYPES OF ACCOUNTS YOUR FAMILY NEEDS
1. Regular Checking. This is the account from which your basic household expenses are paid. Things such as your mortgage, utilities, loans, etc. It is also the account where cash is withdrawn in order to live on a cash only budget.
This account is not used for emergencies or other items which are listed below. This is the only account which will also have a debit card which can be used as well.
2. Emergency Savings Account. This account should be for, well, emergencies. This means events such as the furnace needing to be replaced or to repair the broken window. These situations should be dire. Your vacation, birthdays or other known events should not be paid from your emergency fund.
Tips to make this account work:
- Savings should be automated. Set up an automatic deposit from your paycheck each month. If that is not possible, you can also arrange for an automatic transfer from your main account into this one. The idea is to have it deposited to your emergency account before you have a chance to use it on something else.
- Determine the amount you should save. If you are new to creating an emergency fund, try to start out saving at least 5% of your paycheck. Slowly increase 1% per pay check until you are up to 20% savings.
- Have a minimum of six months saved. You should be able to fully cover at least six months of living expenses as a single person; nine months if you have a family. Ideally, everyone should have one full year of income saved. It can happen, it will just take time to do it.
- Keep the account out of site. Sometimes, seeing a large balance in an account can be tempting. You might want to use that for a great deal you found on an item you’ve wanted forever. Don’t do it. Try to keep the checks locked up so that you are not tempted to dig them out and use it; and also do not get a debit card for easy access.
3. Regular savings account. Your regular savings account is the one where you set aside money for any annual or other recurrent expenses.
Here are examples of what you might put into your regular savings account:
- Life insurance premiums
- Auto insurance premiums
- Home owner insurance premiums
- Home Owner’s Fees
- Vacation savings
- Birthday savings
- Furniture savings
- Auto repairs (tires, oil changes, etc)
This account is not meant to be accessed regularly. However, it is also there to make sure you set money aside for the expenses you know will be coming your way.
4. Kids’ accounts. Each of your children should have his or her own accounts. Start out with a savings account and when he or she is old enough, you can help them open a checking account.
This teaches your child to save money for the car they may want when they turn 16, money for college or even into the future when it is time to purchase a house.
Teach your child to save 10% of every dollar they earn. This can happen from an allowance, odd jobs or even birthday money! If you start teaching your child good financial habits at a young age, they will know no different when the get out on their own.
5. Mad Money Accounts. This is actually 2 accounts as one is for you and one is for your spouse. My husband and I each have our own mad money account. This is money we can spend on anything we want – without having to run it by one another.
We decided it was time to sit down and look at our budget. We were able to determine an amount with which we were both comfortable. With each pay day, we get a small deposit into our accounts.
I used mine to redecorate my kids’ rooms and my husband went on a turkey hunting trip with his funds. Best of all, neither of us had to run it by one another when we did it. It is 100% our money and we can spend it as we like.
6. Health Savings. Many employers offer health savings account where you can set back a portion of each paycheck to use towards deductibles and other health related expenses each year. While it is great as it is taken out pre-tax, if you do not use it all, you will lose it.
If you do not have such a plan through your employer, then it is up to you to save money each month to cover medical expenses. Here are some things to keep in mind:
- Enough to cover at least 12 months of medications.
- Your deductible. Since it can take one emergency for you to hit your deductible, make sure you have this amount saved.
- Never allow your account to drop below the total needed for one year’s expenses.
This is just a guide for the accounts my family uses. It works for us, but you may find that you need more accounts than this. There is not right or wrong number. However, don’t have to many, or that may be too daunting to maintain.
For our family, having 6 types of accounts works perfectly. We know which account to use for every type of payment we make. It really has helped us with our own budget and we couldn’t imagine running our family’s finances any other way.