When you are working on improving your financial situation, one important consideration is your banking relationship. It is hard enough to make the right choices, but using the wrong tools can make it even more difficult. Your success at saving and investing your money can depend on the capabilities of your bank.
Your organization is one thing that can go a long way towards your success with your finances. When you are trying to get everything organized, grouping relevant things together is the first step. That is why I think that using multiple accounts will be a benefit to you and your financial plan.
Physically separating your money does a great job of clearly defining the purpose of the money and preventing funds flowing into other categories. This physical and mental separation will help keep you on track to meet your financial targets.
Creating a budget is always one of the first things that you need to do when you’re working on your financial plan. My post on creating a Bulletproof Budget is a great resource for you if you haven’t already created a budget. Once you have determined the amount of money that you have allocated to spending for the month, you need to separate it. You can do this by using a separate account for your spending.
Take a set amount of money out of your paycheck that is allocated for spending and place it into it’s own account. You will be able to keep track of what you have spent and prevent you from accidentally going over. This should be the only account that you have your debit card linked to for Point of Sale purchases.
This is obviously the account from which all of your monthly bills will be paid. If you are creating a well organized budget and financial plan, you know how much money you will need for bills out of each paycheck. Take that money and transfer it into the bill account.
If you’re concerned about overdrawing this account, it is ok to keep a cushion of between a few hundred dollars and one thousand in the account at all times. The timing of the bill payments, or maybe some fuzzy math skills could cause your bill account balance to come way too close to $0. Another option is to link this account to a savings account in the event of any overdrafts.
When we talk about saving accounts, I am talking about the account that is used for cash savings. This does not include any investments accounts and it will also be the account for the emergency fund. As with any savings, this process should be automatic. No decision of how much to save should have to be made on a regular basis. Once you have decided what the number needs to be, set it and forget it (In my infomercial voice).
Most companies that offer direct deposit give you the option to deposit your paycheck to multiple accounts. Add your savings account as one of your direct deposit accounts and set up the amount of money you want to send there. The remainder of the money can either go to the Bill account or the Budget account. You can allocate these funds between the accounts as you see fit based on your bill needs.
One benefit of having all of these too-big-to-fail banks is the ability to have a one-stop shop for all of your finance needs. You can have all of your Checking and Savings accounts at the same bank that handles your credit cards, Auto loan, Mortgage loan and Investments. I’m sure there are even more types of accounts and services offered, but these are the big ones.
There are benefits and drawbacks to having all of your business with one bank. One benefit is the fact that you can see all of your information in one place. When you log into your online profile, you basically get a glimpse of your Net Worth minus any hard assets. This can be convenient to keep an eye on your entire financial situation.
Having it all in one place gives you the option to easily move money between accounts and pay bills. It is easy to pay your mortgage if it is simply a transfer from one account into another. Visit wisepiggy.com for a list of pros and cons of bundling.
Large Bank vs Credit Union
With the advent of the large banks over the last 20 years, there has been a recent move back to the feel of a smaller bank. With large banks, there was that loss of personal connection with your banker at the local branch.
Loans were no longer granted by your local banker, and the trust that was built from the long relationship was non-existent. Having accounts with your local credit union can restore that feeling of a personal banking relationship.
According to thebalance.com, the main benefit of joining a credit union is that you become more of a priority as a member than the stockholders. There is no push to increase costs on account holders to increase income and drive up the stock price.
When you have accounts at a large bank, there can be more conveniences. Large banks have multiple branches and one is usually always near you, even when traveling out of state. You will have the option to have different types of products with your bank, like mortgages, credit cards and checking accounts. One big consideration is the ability to have all the new banking technology, like a banking app. Being able to easily manage your money on the go is a big benefit.
To recap, in order to organize your finances, setting up multiple accounts is the best way to accomplish that. Open a Budget Account, Bill Account and a Savings Account. Carefully weigh the decision to open these accounts at a large bank of a credit union.
Subscribe above to get the latest updates.