This is Part 1 of a series on the nuts and bolts of how I manage my money. In this first part, I discuss how I use checking and savings accounts.
Normal income gets deposited (hopefully direct deposited) into my checking account. Linked to my checking account is a savings account, actually a money market account, at the same bank. (I know, I know, a money market account is not technically a savings account, but for all intents and purposes it is. Here I use the term “savings account” when I refer to money market account.)
I do not keep a lot of money in the checking account, just enough for the bills, and for a small emergency. I keep a little more in the savings account. I keep enough in these accounts to avoid any bank fees. If I need some cash when my checking account gets low, I can easily transfer without a fee from the savings to checking and vice versa. At my bank, this transfer is immediate.
You can do this at just about any bank or credit union. Be sure to understand any minimums, fees, etc. Eliminating fees is a important factor in being conscious about your money. After all, it’s your money. I want to keep as much as I can from falling into the hands of others, banks included.
As it happens, the bank were I have the checking and linked savings has some minimums, so I am sure not to go below those amounts because I want to avoid paying fees. In addition, the minimum is lower if I set up an automatic monthly transfer of a certain amount from checking to savings. So I set it up. It’s also a hidden way to save. I can always transfer the money back to checking at any time if I need it, and I sometimes do.
One reason I like this bank is that it has local branches. I can always walk into any branch if I need something taken care of. All banks have varied reputations (translation: all do bad things from time to time), so it is a matter of a personal decision where one keeps one’s money.
I do have a second saving account.
My second account is a “high yield savings account” at an online bank. Here I keep my main emergency fund. I have enough in this account for me to feel safe and comfortable. The interest in this account is much higher than either my checking or savings at my local bank. (“Much higher” is not saying much when the interest rates are so low these days. But it’s something.) You can find online banks with high-yield accounts by searching online. Find some reviews and opinions before choosing a bank.
How much is a “safe and comfortable” amount?
Everyone has their own definition. It took me years to get there, but for me it is an amount I feel I can sleep comfortably regardless of what is going on in the economy or in the stock market. I could live on the funds there for a relatively long time should everything else hit the fan.
Transfers to and from this account to my regular checking account are free but take about three business days (don’t ask why, I suppose so they can avoid paying interest for those three days), which means I cannot spend it on a whim, which is just fine for me. I always initiate transfers from the bank with the high-yield savings.
During my employed years, I set up an automatic transfer monthly from my checking to my online bank high-yield savings account.
Getting my paycheck
When working, my paycheck was deposited into my main checking account, I entered my net paycheck amount into the check register when it was received. I immediately also added a second item for the transferred to the online bank savings account.
What is a check register?
A check register is the little paper booklet that accompanies the checks in a checkbook. The register is where you write the information about deposits, withdrawals, and checks. It is where I keep a running balance of the checking account.
I pay my bills from the main checking account. For bills that are automated and are the same amount each month, like the mortgage, I would enter the amount into the check register on the first of every month, even if the scheduled date is later in the month.
If there is no fee to pay a utility bill by credit card, I used a credit card so I would get points or frequent flyer miles, depending on the card. (See Mechanics of Money Part 2 about credit cards.) Some utilities charge a fee if paying by credit card. In that case, instead I paid that bill using my checking account’s “bill pay” feature which also means the bank pays postage. Then I paid the credit card bill from my checking account when it arrived. More on credit cards in The Mechanics of Money Part 2.
Saving some time when using a checking account
I do keep track of all deposits to and payments from my checking account. I enter every transaction into my check register. I keep the balance up to date, more or less. To save time and avoid some inadvertent errors, I maintain the balance in the check register but use only full dollars when adding or subtracting. I had found that most errors occur when I try to be too precise. So if I need to add or subtract a number that is not an even dollar amount, I do so by rounding up or down to the nearest dollar.
That means that I will be off by a small amount from the bank’s official balance amount. For me, that is a small price to pay for two benefits: One, less time trying to calculate the exact balance to the penny; and two, even when I tried to keep things to the penny I often was off from the bank’s calculations. So this method reduces potential errors, at least for me. Every few months, I check to that if there happen to be no outstanding transactions at that time, I adjust my check register balance to be whatever the bank says my balance really is.
Checking my checking
BTI (Hey, do you remember there was such a time as Before The Internet!?) one would wait for a paper statement to come in the (snail) mail once a month. At that time one could reconcile one’s check register with the statement, and see which checks were still outstanding, etc. Nowadays, I don’t get a paper statement. I usually check my checking account online daily to see what transactions take taken place and update my check register, so I know the state of my account.
Money saved. Then what?
Just because I have money saved does not mean I feel obligated to spend it. Spending everything I earn is detrimental to my financial well-being. Building wealth means that I need to keep some of the money I earn. When I use the money I have, I want it to be to my benefit and to use it appropriately.
What Do I Do With My Money?
I have automatic deductions from checking to regular and high-yield savings. I also have automated deductions for investing. I consider these actions to be part of the “pay yourself first” plan.
What is the purpose of saving?
The purpose is to Build Wealth. As I mentioned previously (here) , it is impossible to save enough to build wealth. One needs to invest. However some cash is always needed, which is the purpose of checking and savings accounts.
How do you handle checking and savings accounts?
Mechanics of Money Part 2 is about credit cards. Investing is covered in Mechanics of Money Part 3.
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