In our houses and apartments, we store stuff in a million clever places and ways.
We use a few means to store our superfluous stuff—junk drawers, wicker baskets, Container Store whats-its, under the stairs closets, and then there’s...the garage.
So we put a lot of thought and energy into the storage of all of our stuff, but what about the storage of our money? Our wealth deserves the same love as all the buttons, seashells, and Polaroids we store in mason jars and drawers. Really, it deserves all that and more.
Money with different purposes like spending cash, retirement, kid’s college—let’s call them “buckets” of money—need their own metaphorical mason jars, too!
But in a world with hundreds of storage options, it can be daunting to know which types of accounts we should be opening (or closing) and where.
To make it easy, I’ve reduced the options down to only the types of accounts that every workin’ lady must-have, with a few additional options for overachievers.
Getting the right accounts open might feel a lot like building a new dresser from IKEA: It will be painful for a couple of hours, but you will be so proud of yourself once it is done!
What We Cover
- Checking Account
- Emergency Savings Account
- General Savings Account
- 401(k)
- Roth IRA
- Traditional IRA (Optional)
- 529 Plan (Optional)
- Additional Investment Account (Optional)
The Checking Account
A checking account is likely where your paycheck is automatically deposited and keep cash that you want easy access to—your spending money!
Checking is often the first—and for some, only—account that people open. This makes sense when you are first starting out, but once a solid financial infrastructure is built your checking account will actually be more of a “leftover” bucket—what remains after paying bills and allocating money to savings accounts.
So we all have one, but the key is making sure you have the right one.
How to Pick the Best One
When choosing a checking account, find a bank that won’t charge fees. Some banks require a minimum balance or automatic monthly deposit. If you use ATMs frequently, be sure to find one that won’t charge for out-of-network use!
Here's a great tool created by Nerdwalletthat allows you to compare banks in your ‘hood.
While most people use large commercial banks like Bank of America and Wells Fargo, it is worth exploring online-only banks and local credit unions. They often offer free checking services and better interest rates on money held in savings accounts!
Emergency Savings Account
Along with paying down credit cards, creating a bucket dedicated to emergency savings should be your top financial priority. It is generally recommended that you keep six months of living expenses on hand in the event of emergency or lay-off.
At the very least, start out with $1,000 or enough to cover insurance deductibles. An Oh Sh*t Stash, as I like to call it, should be separate from your checking account but easily accessible.
How to Pick the Best One
As with every account we discuss here, you can and should find an option that charges you no monthly fees. Beyond that, it’s your preference.
Don’t worry—I’m not leaving you hanging. I’ve covered some of the various savings account options in detail in the next section right...here.
Savings Account for Everything Else
If you’re saving up for a house, wedding, the holidays, or anything else in the next one to five years, it is a good idea to set up an additional saving account separate from your checking account.
Historically, everyone kept savings in true savings accounts because you could earn money on interest. These days, interest rates are low and there’s little extra to be earned.
Because of this, many people just keep all savings in their checking accounts, but this isn’t a great idea either. Studies have shown that keeping savings a bazillion miles away from the swipe of a debit card bolsters savings success rates.
And it’s fun to watch savings grow!
How to Pick the Best One
With savings accounts—for any purpose—you have three options. The first is to simply use the commercial bank where you keep your checking.
The benefit of this option is that this money will be the easiest to access and it’s a breeze to move money from checking. This option might make sense for emergency savings.
Beware—commercial banks nickel and dime—an automatic deposit or minimum balance might be required to avoid monthly fees.
Second and third, you can consider an online-only savings bank or a local credit union.
Online-only banks often offer better interest rates (the best are currently around 1%) and fewer fees, but slightly less access to your money. On average, you are limited to six withdrawals a month. (Which, if you are withdrawing money from savings more than six times a month, you are doing it wrong.)
Like online banks, some local credit unions offer Certificate of Deposits (CDs) that may pay slightly more than 1% if you’re willing to lock the money up for a couple of years.
Now, 1% interest gets me about as excited as cavity-free trip to the dentist. It’s cool, but I’m not exactly pouring myself a victory whiskey (or am I?). You’ll have to decide whether moving your savings online is worth it for 1%.
Personally, I appreciate the ability to open multiple free, no-minimum savings accounts that online banks offer. Similarly, some banks offer a “sub-accounts” feature so you can track progress on different savings goals with ease.
When it comes to saving, the best accounts are always the ones that get used! Find accounts that are easy to open and have good online access.
Once savings accounts are established, set up automatic deposits from checking to your savings account(s) three days after your paycheck hits (in case the date falls on a weekend).
Now, 1% interest gets me about as excited as a cavity-free trip to the dentist. It’s cool, but I’m not exactly pouring myself a victory whiskey. You’ll have to decide whether moving your savings online is worth it for 1%.
401(k) Or Your Workplace’s retirement Account
If your company offers a retirement account, use it! Elect a percentage of your salary to be taken directly from your paycheck and siphoned into your 401(k) or 403(b). Voilá!
How to Make the Most of It
Your goal should be to save between 10-15% of your salary for retirement within an account specifically designed for retirement money. Retirement accounts offer unique tax benefits over the savings accounts discussed earlier.
A 401(k) is tax-deferred which means you pay no income taxes upfront and no taxes on any gains you make investing (called capital gains taxes).
You will pay income taxes later, when you take money from the account to spend in retirement. (Also, there’s a penalty if you remove money before age 59 1/2.)
Additionally, your employer may offer some match—always take advantage of this free moola! For example, if you put 6% of your salary into your 401(k) and your employer “matches” at 50%, they will add 3% to your 401(k).
The contribution maximum for a 401(k) in 2020 is $19,500.
Roth IRA
If your employer does not offer a company retirement account, consider opening a Roth IRA. You can also open a Roth IRA in addition to your 401(k) if you’re feeling extra-motivated for retirement savings!
A Roth IRA is different from a 401(k) or traditional IRA because you do pay income taxes up front, but never again. Similar to a 401(k) and traditional IRA, you do not have to pay any capital gains tax (that tax on investment gains).
Roth IRA accounts were designed for earners in lower income tax brackets—the idea is that you’re not paying much in taxes right now anyway, so get ‘em over with and the money is hereby free from Uncle Sam’s wrath.
The contribution maximum for a Roth IRA in 2020 is $6,000 ($7,000 if you're age 50 or older). Also,Roth IRA contributions are limited by income level.
In general, you can contribute to a Roth IRA if you have taxable income and your modified adjusted gross income is either: less than $194,000 (phasing out from $184,000) if you are married filing jointly.
Optional: Traditional IRA (Same as Rollover IRA)
A traditional IRA is a retirement account that is taxed like a 401(k) but designed for people that do not have access to a 401(k) or other workplace retirement plan.
If you are above the income maximum for a Roth or want to lower your taxable income for the year, consider opening a traditional IRA, Solo 401(k), or a SEP IRA if you’re self-employed.
Take the time to understand the differences and choose the one that is right for your income, employment, and tax situation!
(For more information on choosing the right retirement account, read this.)
A traditional IRA is a useful place to consolidate all of your old 401(k) accounts. It is very rare that young people stay with the same company for more than a few years, but managing your finances is too complex if you have a bunch of obsolete 401(k) accounts floating around at different banks. Roll them all over into a traditional IRA.
If you are going to open your own Roth IRA or IRA account, I recommend that you do so at a low-cost brokerage bank like Vanguard, Charles Schwab, or Fidelity.
These banks have low account minimums or minimums that can often be waived with automatic deposits. They also offer good, affordable investing options.
Optional: 529 Plan
If you have a kiddo and want to save for their college, do it in a 529 Plan! Like a retirement account, a 529 provides a tax advantage because you’re saving for something productive.
It’s no secret that college costs are skyrocketing—you’ll be so pleased with yourself if you start early, even if it is just a small amount each month. You can open up a 529 Plan at all major brokerage banks.
Optional: Additional Investment Account
If all your debt is paid off (except home mortgage) and you are maxing out your retirement accounts and want to do some additional long-term saving and investing—first of all, you are totally killing it—and second, you may want to consider opening an additional investment account.
You can open a general brokerage account at the same discount brokerage bank at you opened your Roth IRA. A brokerage account is just like a bank account, but for the fancy stuff (stocks, bonds, funds, etc.).
Alternatively, consider using digital services like Wealthfrontor Betterment. These services invest your money in a desirable “passive” strategy based on your goals and for a fairly low cost.
They’re each a little different so some preliminary research is a must, but are definitely worth checking out if you want some extra long-term financial planning guidance or prefer to pay someone to do all the work for you.
