6 Essential Money Accounts
When managing your hard earned money, every dollar has a purpose. Funds that are not spent on wants and needs that remain in your possession should be saved and invested using the proper tools. In this post I’m going to discuss the 5 different account types an individual should have regardless of their employment, income, or age. Properly maintaining these accounts can lead you to financial independence much sooner and reduce a lot of financial stress as you grow closer to retirement.
Reduced Fee Checking Account
Even the most aggressive savers and investors still need to spend money on a daily basis. In the world of consumer banking, we now have many payment options at the checkout counter or in our digital shopping cart. Regardless of the method you choose, almost all of us have a debit card linked to a checking account. We typically obtain cash and make purchases from this account but many ignore the fact that they are paying unnecessary fees to use their checking account. Here are the 7 most common fees associated with a checking account:
- Monthly service fees
- Overdraft fees
- Non-sufficient funds (NSF) fees
- ATM fees
- Paper statement fees
- Foreign transaction fees
- Account closure fees
Some banks allow you to waive these fees if you meet certain criteria. It’s important to research various banks and investigate which ones have the best products for you. My bank, for example, does not charge overdraft, monthly service, or ATM fees if I keep a certain amount of cash in the account. I also have a WorldElite Mastercard debit card that allows me to withdraw local currency while converting USD on the back end. When signing up for a checking account, many banks will offer a joint savings and checking account. Opting for the dual account will help you stay organized by creating a spend and save pile in your budget. There may be an advantage such as free paper checks, for example, for opening up both.
It is nice to be a member at a brick and mortar bank for some other benefits as well. Treasury bonds are available at banks for purchase. If you have any paper bonds you received or purchased a long time ago, they can be redeemed in person at the bank. Many banks allow you to convert currency but you need to have an account with them in order to do so. Bank conversion rates are less than at airports and travel destinations so you can save money by using a local bank. Having a local bank offers a convenient and fast way to get a bank check, which is required for some purchases.
High Yield Savings Account
A high-yield savings account is a type of savings account that has higher interest rates than a standard savings account with additional features. There are online high yield savings accounts that offer a higher earned interest rate than their brick & mortar counterparts. These high yield savings accounts are a great place to save money that will be used in 2 years or less. This type of account is appropriate for holding an emergency fund or down payment for a property. If you leave large amounts of money in savings accounts for extended periods of time, it will lose value over time due to inflation. Money that you want to save but do not want to touch for many years should be invested so it can grow.
I use Ally bank for my online savings account. The interest rates are towards the upper end of what is available out there. I have seen rates from Ally as much as 10 times higher than standard savings account rates offered by large national banks. The online and mobile app is user friendly and makes it easy to transfer funds to and from a brick and mortar bank and investment accounts. The interface makes tax forms a breeze as well.
Traditional IRA Account
A traditional individual retirement account or IRA will allow you to save and invest for retirement with some added benefits. Contributions to an IRA are tax deductible, so if you contribute $5,000 to an IRA in any year, you can take $5,000 off of your taxable income. When money in an IRA is withdrawn, taxes are to be paid as regular income. You must wait until the age of 59 ½ to withdraw any funds without a penalty. IRA’s open up your money to a full range of investments that include mutual funds, ETF’s, stocks, bonds and other securities. The money invested in a traditional IRA is strictly for retirement so plan accordingly as to how much you want to contribute to achieve your goals. Many choose to deploy cash in other investments such as real estate before opting to put significant amounts in an IRA.
A traditional IRA provides benefits after you’ve changed employers. An employer’s 401k plan can be rolled over into your personal IRA after leaving the company to pursue a new job. The advantage to doing this is that there are typically less fees associated with managing the account. Some 401k plans have limited selections of funds to invest in. There may be only 10,20, or 30 investment choices in some plans. By rolling over the investments, it opens up the opportunity to invest in all sorts of funds, many of which may have a lower expense ratio. Make sure to contact your plan provider to understand which options you have.
Roth IRA Account
The Roth individual retirement account is another type of tax advantaged account to help with retirement funding. Unlike a traditional IRA, Roth contributions are after-tax funds that are deposited into the account. The main benefit to the Roth IRA is that the money can be withdrawn at age 59 ½ without having to pay any taxes on the distribution. There is a maximum amount you can contribute to a Roth each year and there are income limits. Setting this account up earlier in life can be very beneficial to your financial journey. To learn more about the details of the Roth IRA, check out my other post on investing with a Roth IRA account.
Taxable Brokerage Account
The fifth and final account is the taxable brokerage account. This is a standard investment account which allows the purchase of investment funds with after-tax income. The gains in a taxable brokerage account are subject to short and long term capital gains depending on how long the securities are held. There are no limits to age, income, or contributions with a standard brokerage account. Once all other specialty and retirement accounts are contributed to, the standard brokerage is a great place to keep additional investments.
Health Savings Account
An HSA, or health savings account, is similar to other tax advantaged accounts. The intent of the HSA is to help with healthcare costs an individual would otherwise need to pay out of pocket. It is worthwhile to have an HSA due to the triple tax benefit. Money that goes into the account is tax deductible, the growth of the account is not taxed, and the distributions come out tax free when used for qualified medical expenses. Many HSA’s allow investment into mutual funds and index funds to grow with the stock and bond markets.
Some expenses that allow you to pay with an HSA include deductibles, copays, and other healthcare service costs. These apply not only to yourself but to a spouse and any dependents as well.There are always things that insurance does not cover so an HSA is a great safety net to have for when these charges are incurred. The average person beyond the age of 65 spends approximately $200-300k in total out of pocket medical bills to carry into older age. For many that are retired, these bills can cut into their budget.
One drawback is that not everyone is eligible to participate in an HSA. It is required to have a high deductible health plan. There are also contribution limits based on family size. Take a look at the current health plan you are enrolled in and contact the plan provider to see what they have to say about an HSA.
These 6 accounts will help anyone achieve their financial goals much sooner. These are just some of the tools used for building wealth. If you use some or all of these accounts already, let us know how you manage them effectively.
