The 3 Bank Accounts Every Family Needs • Financial Coach Shannon Clark
How many bank accounts do you need? In short, families need at least three. Today, I’ll lay out how to choose the best accounts and where to park your emergency fund.
Back in December, I walked into a thrift store but unknowingly walked out with something unexpected. You see, I had to pick up a couple of pairs of pants for my son. It seemed he was always running out before it was time to do laundry.
A couple of weeks later, I’d already washed them a few times, and we were now standing in our local dollar store. As I was browsing kid art supplies, my son pulled a $10 bill out of his pocket.
The huge grin on his face showed his unexpected delight. But his surprise thrift-store find was nothing compared to what one Michigan news station reported.
According to their segment, Howard Kirby bought a couch from a Habitat for Humanity store for his man cave. After noticing that it was quite uncomfortable, his daughter began to investigate. From inside the cushions, she started pulling out handfuls of cash. All told, it was stuffed with $43,170.
I think we can all agree that your pocket or even a couch cushion isn’t the best place to stash your cash. But that begs the question: where should you keep your emergency fund?
Today we’ll cover everything you need to know about choosing the best bank accounts to meet your family’s needs:
Let’s get started.
How many bank accounts should you have?
To steward your finances well, every family needs at least three bank accounts.
Your checking should contain your monthly operating expenses. Your income gets deposited into your checking. From here, you pay bills, buy groceries, and do your regular monthly spending. You also move money out of this account to save for the future.
However, no funds earmarked for savings should stay in your checking account.
For checking, almost any bank will do as long as there are no fees. I’d also add that they should have easy-to-use online baking. Because I can deposit checks using the mobile app, I never go to the physical bank. In fact, there’s not even a branch in my town.
I have my primary checking account with Chase Bank. (Use my referral link to sign up, and you can earn a $200 bonus for signing up.)
I’ve been with them since college when they were Washington Mutual and have always had a great experience.
2. Emergency Fund
In addition to your checking account, you also need a savings account to house your emergency savings fund. As the name says, the money in this account should only be used for true emergencies. Ideally, this is where you’ll build up a 6-month savings account.
If an emergency situation ever does happen, you want to be able to access those funds fast.
That’s why I chose to set up my savings accounts through Capital One 360. They have an excellent interest rate but not quite the highest in the industry.
However, they were the only option that offered a linked checking account. That way, I have the peace of mind that I could access my emergency fund immediately if need be, even though it’s an online account.
I’ve even experimented in transferring funds from savings to checking. You don’t have to wait 2 or 3 days of the transfer. They become available immediately.
Next-Step Resource: The Ultimate Guide to Emergency Funds for Moms
What type of savings account earns the most interest?
You should park your emergency fund in an online high-yield savings account because these typically have the highest interest available. The rate is many times higher than what you’ll get at a typical brick-and-mortar bank or credit union.
Any account you choose should have no fees, a great interest rate, and possibly linked checking available. (More on that in a minute.)
While the interest rate may not be that important to you when you’re just starting your savings, as you continue to build your rainy day fund, interest gives you a nice boost.
This is another way to get free money to help you toward your goals.
For example, imagine you save up $20,000 in your savings fund.
Right now, a Capital One 360 account earns 1.5% interest.
Over 12 months, you’d earn $300 to use toward your financial goals. (That’s like giving yourself a $25/month raise.)
This is the fun part when your money goes to work for you, and you start earning interest instead of paying it on loans and credit cards.
This quick snippet of a coaching call with one of my Budget Breakthrough students shows my favorite options for setting up savings accounts.
Should my emergency fund be invested?
As a mom, I’m sure it goes without saying that you want to be prepared to care for your family no matter what challenges come your way. For that reason, you want to keep your emergency funds accessible, so they’ll be there whenever you need them.
However, as you build significant savings, it could be tempting to think about investing the money. After all, you could potentially earn a better return than what you’re getting in savings. The problem is, if disaster strikes, you have a problem if all your money’s tied up in investments. Besides, the downside of risk is that the value will go down instead of up.
Thankfully with high-yield savings accounts, you don’t have to choose. You can earn a decent interest rate while your money is safely stashed away in an FDIC insured account that you can access anytime.
Sometimes access isn’t best
For many, a savings account with linked checking is ideal, so you can access funds when you need them. However, I had a student once who did the opposite with excellent results.
She intentionally chose not to link her accounts. Even more, she put her savings in a bank that was across town from where she had her checking account. To be honest, she is a meticulous budgeter, and I don’t think she was in any real danger of burning through her emergency fund with frivolously spending. But she wanted to be sure.
Every time she got paid, she would drive to the first bank to deposit her check. She would physically withdraw anything extra and drive over to the second bank to put in her savings account.
There was no linked checking to her savings and no ATM card attached. If she wanted to make a withdrawal, she’d have to go during business hours to the branch.
Though it may seem like a lot of extra run around, she actually found it fun. She felt so proud every time she got to make a deposit toward her savings goal.
If an unexpected expense came up, she would do whatever she could to cash flow the cost from her checking.
Most importantly, the set up guaranteed that she could not spend her savings without some serious planning ahead of time. She says, “I developed the habit that it’s a one-way street account where money goes in…and doesn’t come out.”
3. Savings for “Surprise” Expenses
While it may seem like two bank accounts might be enough, you’d be missing out on an essential part of managing your money.
The third type of bank account you need is to hold savings for non-monthly expenses, also know as Sinking Funds.
For example, the money you have put away for your car registration coming up in a couple of months should be in a separate account from your general Emergency Fund.
These are expenses we often think of as unexpected, but Sinking Funds allow you to plan and save for them ahead of time. Thus prepared, all the stress is sucked right out of your finances.
For this second savings account, you should look for the same characteristics as your Emergency Fund account. A high-yield savings account works best. Open one that has no fees, a high-interest rate. In this case, however, a linked checking account at the same institution is non-negotiable.
Unlike your emergency fund, you will move money in and out of your Sinking Fund account regularly, sometimes several times a month. Access really is vital here.
But isn’t it a pain to keep track of all these accounts?
The short answer…not really.
When I follow my budgeting system, the same one I teach to my Budget Breakthrough students, it takes me between 1 and 2 hours per month to manage my accounts. This includes making my budget, tracking expenses, and checking my financial goals.
Averaged over the month, that’s less than 5 minutes per day. And with all the money it’s saved us over the years, I’d say it’s well worth it.
The magical money disappearing act
Some may say that it doesn’t really matter if you keep your savings in your checking account, as long as you look at your budget and see that your savings amount isn’t available to spend. But I have found both in my own experience and that of my students, that is rarely the case.
As you know, I am dedicated to my budget. Yet, we fell into this trap for years. While we did well most of the time and were able to reach our goals, it seemed our non-monthly savings were always floating somewhere between our checking and our savings.
And you can imagine what happened next.
Often, it disappeared, unaccounted for.
It wasn’t until about a year after we became debt free that I discovered how helpful it is to keep three separate bank accounts.
Having multiple accounts gives you a fail-safe. That way, if you ever have a time when you aren’t keeping up with your budget as you should, you’ll still be able to see three separate pots of money. Most importantly, your savings fund is partitioned off and inaccessible from your regular monthly spending.
Here’s the gist.
Families need at least three bank accounts
- Emergency Fund Savings
- Savings for Non-Monthly Expenses
For most, high-yield online savings accounts with a linked checking account will be the best bet.
Remember Mr. Kirby and the $43,000 couch? Well, with the help of the thrift store, he was able to track down the owner, Ms. Kim Kim Fauth-Newberry. She could barely speak through her tears when he placed every single dollar back in her hands.
The gesture was especially sweet because the couch had belonged to her grandfather, who had recently passed away.
I think it’s safe to say that she’ll find a better way to stash his savings from here on out.
And I hope by now, you’ve discovered some better options to put your rainy day funds as well.
Now it’s time to take action
Create your savings accounts. It only takes a few minutes, and you can do it online. Then, start using them to better control access to your money — so your money stays on that one-way street to savings.
If you’re interested in learning more about how to save and plan for non-monthly expenses, the right place to start is the Budget Quick-Start Toolkit. You can find out more right here.