Originally published on Career Contessa. (Please click the link for Career Contessa’s original, edited version. Paragraphs below altered from the original.)
In our houses and apartments, we store stuff in a million clever places and ways. Drawers overflow with doodads and there are vases and wicker baskets, not to mention garages, closets, and shabby chic armoires. And then, there are Caboodles. There’s little I cherished more as a wee lass than this groundbreaking, pink-and-teal double-decker treasure chamber from the 1990s. I am 93% certain that behind every powerful, organized woman was a childhood Caboodle.
We put a lot of thought and energy into the storage of all of our crap, but what about the storage of our money? Our wealth deserves the same love as the pencils and seashells that beam from within our adorably arranged mason jars (tied up with twine that is somehow at once reminiscent and blazingly en vogue.)
Money with different purposes like spending cash, retirement, kid’s college—let’s call these different “buckets” of money—need their own metaphorical Caboodles and mason jars, too! But in a world with hundreds of money-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 included only the types of accounts that every workin’ lady must have, with a few additional options for overachievers. Getting the right accounts open is going to be a lot like building a new dresser from IKEA: It’ll hurt like hell for a couple hours but you will be so proud of yourself once it is done!
1. 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.
How to pick the best checking account:
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 Nerdwallet that 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.
2. Saving Account for Emergencies
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 layoff. At the very least, start out with $1,000 or enough to cover insurance deductibles.
An Oh Sh*t Stash should be separate from your checking account but easily accessible. And with every account we discuss here, you can and should find an option that charges you no monthly fees. Bank accounts with fees are like sex without a condom—easy to accidentally let it happen but never, ever actually worth it!
3. Saving Account for Everything Else
If you are saving up for a house, wedding, the holidays, a Cheeto in the likeness of Harambe, or anything else in the next 1-5 years, it is a good idea to set up an additional saving account separate from your checking account. It’s up to you whether this money is combined with Emergency Savings.
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 is fun to watch savings grow!
How to pick the best savings account:
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 money will be the easy to access and it’s a breeze to move money from checking. This option might make sense for emergency savings. Beware—commercial banks will nickel and dime you—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 lower 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.
For a direct link to set up a savings account at my favorite, low-cost online bank, download my 8 Tools For Getting Your Financial Shit Together.
When it comes to saving, the best accounts are always the ones that get used! 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).
4. 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 from your paycheck and siphoned into your 401(k). 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 up front 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.
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 2017 is $18,000.
5. 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 saving!
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 a lower income tax brackets—the idea is that you’re not paying much in taxes right now anyways, so get ‘em over with and the money is hereby free from Uncle Sam’s wrath.
The contribution maximum for a Roth IRA in 2017 is $5,500. Also, you can’t earn more than $133,000 as a single tax filer and $196,000 as joint filers, with available use tapering off at $118,000 and $186,000, respectively. Here’s more info on how to pick the right retirement account.
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!
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. Here’s exactly how to do this.
How to pick the best Roth IRA and IRA account:
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.
For direct links to set up a Roth IRA Charles Schwab and Vanguard, download my 8 Tools For Getting Your Financial Shit Together.
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 start early, even if it is just a small amount each month. You can open up a 529 Plan at all major brokerage banks mentioned above (Vanguard, Charles Schwab, and Fidelity).
Optional: Additional Investment Account
If all your debt is paid off (except home mortgage and federal student loans) 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.
How to pick the best investment account:
You can open a general brokerage account at the same discount brokerage bank at you opened your Roth IRA or Traditional IRA. A brokerage account is just like a bank account, but for the fancy stuff (stocks, bonds, funds, etc.).
Alternatively, consider using one of the new robo-adviser services like Wealthfront, Learnvest, or 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.
Have any questions, or want to share your favorite bank account? Write them in the comments!