Not too long ago, I made a video about why I have 22 bank accounts. And it’s always funny watching the reaction that I get on these types of videos. To put it simply, many people thought I was doing WAY too much.
Note: I use Personal Capital to track my various accounts + my net worth for FREE
Who needs 22 accounts? In truth, I don’t NEED 22 accounts but it works for me because of the way my brain is wired. I like the idea of keeping funds physically separated into different pots. Basically, I’m like the little kid that doesn’t like her food touching on the plate. Yes, the food ultimately ends up in the same place, but visually it’s more attractive when the carrots, chicken, and rice are occupying their own corners of the plate. I feel the same way about my money. But not everyone does. If you’re looking to keep your accounts as simplistic as possible then this breakdown is for you.
7 Bank Accounts You Need to Build Wealth
Account #1: A simple checking account.
This checking account serves as the main hub or the main repository for all of the money flowing into your household. All direct deposits and sources of income will be deposited into this account. As you begin to conquer your money, you get comfortable with managing your cash flow, you’re going to have more and more money available to you to do more things with.
Account #2: A short-term savings account.
The purpose of this account is going to be to save up for irregular expenses that occur periodically throughout the year. All of us have expenses that come up periodically or maybe on a quarterly basis, making them difficult to budget for. For example, in my household, we pay our car insurance twice per year. So, I don’t wait until the bill is coming up to try to figure out how to pay for it. To avoid a disruption in my cash flow, I save for large or irregular expenses incrementally in short-term savings accounts or sinking funds. Some of my favorite sinking funds include a Christmas fund, a summer camp fund for my kids, and a travel fund. Instead of having separate accounts for various sinking funds, you might choose to house your short-term savings in one account while tracking the balances separately on a spreadsheet.
Account #3: An Emergency fund.
I recommend keeping your emergency fund in a high yield online savings account, or a money market account. If the money is in an online account it’s not overly accessible on a whim. Gradually, you’re going to work towards having three to six months of expenses (or maybe even a year #goals) set aside in case of an emergency. By placing the money in an online high yield savings or money market account, you’ll receive a better interest rate than you would with a traditional brick-and-mortar bank.
Account #4: A Workplace Retirement Account (401k, 403b, or TSP)
Next step we have your workplace accounts. Contributions to 401ks and 403bs are pre-tax so you’ll lower your current tax bill. And later while in retirement, you’ll withdraw the funds at a lower tax rate than during your working years. Investing in workplace accounts isn’t the sexiest way to invest but it gets the job done! Next to the equity in real estate, my workplace accounts are the biggest contributor to my current net worth (into the multiple six-figure range). I didn’t invest in any super special funds. I simply began investing early in my 20s and took advantage of my employer’s matching program. Time and compound interest did the rest.
Account #5: A Roth IRA
The Roth IRA is one of my favorite types of accounts to build wealth because there is so much flexibility built into it. Roth IRA contributions are made with post-tax dollars, so there are no immediate tax breaks. However, contributions grow tax-free and can be withdrawn in retirement tax-free. The Roth IRA is a great account to have in your arsenal, especially for those that desire an early retirement. Unlike 401k or 403b funds, Roth IRA contributions can be withdrawn before age 59.5, without penalty. This lovely benefit positions the Roth IRA as an ideal account to fund a portion of your early retirement lifestyle. And then, at age 59.5 and beyond, you can rely upon the funds from the 401k or 403b to cover your expenses during the more traditional phase of retirement.
Account #6: A Wealth Building Account (Random Pile of Cash)
The sixth account that I recommend is an account for building wealth. All of the accounts that we’ve discussed up into this point, in theory, will help you achieve wealth and financial independence. But this particular account will serve as a long-term savings account. At this moment, you might not have any thoughts of getting a rental property, starting a business, or becoming an entrepreneur. But five years down the line, you might begin to have those thoughts. And you’ll have a big pile of discretionary cash to reach for to help you fund your dreams. So start that account now. Start small, continue to build it over time. And when the opportunity arises, you’ll be prepared to take advantage of it. The wealth-building fund can be kept in a high-yield savings account or a money market account. or you might opt to open up a brokerage account.
Account #7 (Bonus Account): A Health Savings Account (HSA)
The HSA is referred to as a bonus account because not everyone will have access to it. To qualify for an HSA you typically have to be enrolled in a high deductible health care plan. The best thing about an HSA is that it’s triple tax-advantaged. The contributions are tax-deductible, the contributions grow tax-free, and when the money is used for a qualified health care expense, there are no taxes on withdrawals. Another hidden benefit of an HSA is that when you turn 65 the account functions as another retirement account. Meaning that, after age 65, any money remaining in the HSA can be withdrawn for ANY reason, tax-free.
When embarking on a journey to financial independence it’s important to manage cash flow well, with an eye towards wealth building. These 7 accounts will get you started.
How many accounts do you currently have? What’s your ideal retirement age and how much money you think you need to have a comfortable retirement?