Monday, November 19, 2018
A Simple Way to Organize Your Money
I get asked all the time, “What bank accounts should I have,” or “How do I organize my money properly?” Everyone seems to have their own system, which for most people is no system at all. I have met people who have accounts with several different banks, investments at 6 different companies, and they keep track of it all on a scrap piece of paper. I have also met people who hide money in their closet, under their underwear. While I wouldn’t advocate either, I understand both sides. Today I am going to show you a simple way to organize your money. Why is it so simple? That’s because it’s the way I do it and I will show you how and why it works for me. Let’s get started.
At your local bank or credit union, you will need a checking and savings account. The savings account should be free, but the checking account will cost you a monthly fee most likely. Damn banks!
We all have recurring bills and I hope all of us have money coming in every month. You will need somewhere for money to go in and out on a regular basis. This will be your checking account. This account is your cash flow account. Everything you spend will come out of here and everything you save will start from here. This is ground zero for your monthly budget.
You MUST gain control of this account. This account should not be a mystery to you. Sounds weird but every transaction I make from this account, I have a mental alert when my account is going down. If you cannot manage your everyday checking account properly, all personal finance will be a struggle for you.
These checking accounts usually have a monthly fee associated with them. They also have other fees such as NSF (non-sufficient funds), overdraft fees, outside ATM fees and various other fees. If you keep a minimum balance equal to your bank’s standards you will get no-fee banking. My bank makes you hold $5,000 in there to pay no fees. Find out what your bank in forces and make it a goal to have that amount in there. It will be worth it to not have any fees coming out on a monthly basis.
Savings accounts at your bank or credit union are crumby. Despite this, I keep a decent amount in mine. My checking and savings account work together to perform a common goal, keep Joe’s life organized and secure. I use my savings account for my emergency fund.
I DO NOT use my line of credit or credit cards for my emergency fund. The reason is simple: That is not my money.
In my savings account is 12 months of living expenses. Why 12? I made the amount so high because of my situation. While I am in good health, that may change. I like having that extra buffer just in case. I also work in an industry where the income varies from month to month. Having that extra amount in there makes me comfortable should slow times hit.
People ask me all the time, “Where should I invest my emergency fund?” Read that sentence again. Where should I INVEST my EMERGENCY FUND? Invest and Emergency Fund should never be used in the same sentence.
An emergency fund by definition is money you can access quickly that you know will be there when you need it. Investments fluctuate and the ones that don’t are usually locked in for a period of time. Both of those make investing your emergency fund bad business. The simple 1-2% the bank gives you on your emergency fund balance is sufficient. It is not there to make you money, it is there for peace of mind.
Additionally, I use this savings account as a pseudo slush fund. If expenses come up that a little extra cash is needed for, I float them from the savings account and then pay it back ASAP. This is how the 2 accounts work hand in hand. The key is to have a minimum balance for each and vow to maintain it.
As a side note, business owners should have the same sort of system, but separate from their everyday banking. I have an exact duplicate checking/savings account but with a different bank and it is strictly for the world of Budget Boss. It has minimum amounts as well and an emergency/slush account as well. I keep them separate so I don’t blend personal and business expenses, which can make keeping track difficult.
When you have mastered the personal banking game, it is time to make your money grow and work for you. This is where investing comes in. Your investments should be on auto-pilot. This means you have a set amount go into them on a monthly basis right out of your normal checking account. You MUST treat this like any other bill you have. If you don’t automate this process, any excuse or life circumstance will cause you to forget or neglect your future.
Tax-Free Savings Account (TFSA), or Roth IRA (for my American brothers and sisters)
Everyone and I mean everyone, should have it as a goal to max out these investment vehicles. Why you might ask? Because they are TAX-FREE. There are so very few places our government doesn’t have their hands in, and this is one of them. For my younger followers, by maxing out your TFSA, you could be a millionaire in retirement. For my middle-aged and older followers, you get great bang for your buck with these vehicles. They can help you manage cash flow, fund large purchases in retirement, or even leave a lasting legacy.
The maximum contribution room for the TFSA per year is $5,500. It is rumored to be jumping to $6,000 as of January 2019 due to inflation. That means that anyone who was over the age of 18 in 2009 can put up to $57,500 in this account and over $63K in it next year.
When I say, “Make it a goal to max this vehicle out,” I mean you should try your hardest to put up to the maximum in it every 2 weeks. This means you should try to put about $200 and change in it every time you get paid. If you have to work up to it over time, do so.
That is my goal and why I use it as my primary investment vehicle. I do not use it for short-term savings, as was the first intention of those that created it. I use it for long-term savings strictly because of the Tax-Free status. Once you have the checking/savings accounts mastered, focus on this amazing investment account.
Registered Retirement Savings Plan (RRSP) or 401K (for my American brothers and sisters)
The next layer of savings is the strictly retirement-based investment vehicles. Our RRSP is like the TFSA but slightly different. You pay tax when you withdraw from it, which is why I recommend using the TFSA first. You also get a nice tax deduction by contributing to it, which can save you thousands of dollars annually. Both the RRSP and TFSA grow tax-free and both have maximum contribution amounts.
If you can successfully max out your TFSA, I recommend using this vehicle as your next form of savings. The only time I would ever suggest putting money in here before the TFSA, is if your company will match a certain amount of your contributions. In that case, deposit up to the company match, then fill the TFSA next.
4 Benefits of the RRSP
- Tax-Sheltered Growth
- Immediate Tax Savings
- Structured Retirement Savings
- Possible Company Matching
The TFSA and RRSP should be your go-to accounts when it comes to long-term savings goals.
You may be asking, “Why do you have insurance up here when you are talking about organizing your money?” The answer is quite simple: Protection.
You see, I built up the checking account to get no fee banking and for a bit of emergency savings. I also built up the savings account for emergency savings and slush fund needs.
I then build up the TFSA and RRSP for long-term savings as well as the benefits of the 2 accounts, ie: tax-breaks, sheltered growth, etc.
While I have savings in the savings account, I DO NOT want to use it if I get sick/hurt. It will not be enough to sustain me if I get seriously ill. While it does have one year’s expenses in it, I could be sick longer than that or hurt permanently. I do not want injury or illness to derail my future goals.
Emergency funds DO NOT replace income. Emergency Funds DO NOT replace ongoing mortgage payments. Emergency funds DO NOT cover you to the age of 65.
This is why adequate Life, Disability and Critical Illness Insurance is needed. Yes, it is an added monthly expense but to me, it is worth it. I do not want to ever draw from my accounts (checking/savings, TFSA, and RRSP) unless it is for their intended purposes. This is worth the added monthly expense.
Problems with my system
1) Damn Joe, that’s a lot of money
Indeed, it is, or can be, but not if you examine it closely. All of these “Account Goals” can be accomplished over time. You build them is as you go. It demonstrates the need for a balanced monthly budget and why you need to be vigilant at ground zero, your checking account. Also, every situation is different. You may not want or need as much as I put into my accounts. You may have a greater company match than I do, so that will change your situation. The main point is this: Life costs money and it isn’t cheap. The same is true with financial freedom. I bet if I asked 100 people if they would rather have lattes for life or financial freedom, they would choose the latter. While it isn’t that simple, it kind of is.
2) Requires a lot of monitoring
To be honest, it really doesn’t. The only thing you must monitor closely is your spending. If you watch your spending closely, the rest falls into place. It is all automated. You save the right amounts, invest in the proper things, pay off bills, pay down debt including your mortgage, and bam, you’re a millionaire. It truly isn’t rocket science at all.
Positives of my system
1) There are added layers of protection
The savings account protects the day to day checking account. The TFSA protects the RRSP. Insurance protects everything including the family home and your employment. It is literally almost fool-proof. You will have created your own safety net on life, it’s beautiful.
2) You can invest for the long-term because of cash on hand
All that money sitting gaining almost no interest in your savings account also allows you to set your investment accounts to a longer-term outlook. You can a little riskier because you have that cash hedge. You can also take advantage of market downturns and buying opportunities. Cash is king and there is a reason for that, it allows you to buy things. The secret is to buy things that make your life better and make you wealthier.
3) Goal-Setting on overdrive
Build up the checking account to get no-fee banking. Build up the emergency/slush account. Contribute the max to the TFSA or RRSP. These are all goals and while you cannot accomplish them overnight, you can in time. Having this layered system gives you structure and allows you to expand on it. You then can set monthly/annual goals to hit those milestones. My goal for 2018 was to hit one year’s emergency savings in my business account. I hit it with one month to spare. Now onto 2019’s goals. You see how exciting this can be? Challenge yourself and you will be surprised what you accomplish.
That’s how I manage my money. What do you think? Do you think this layered approach is solid? I know it’s what’s best for me and can definitely help others.
“Money is not the only answer, but it makes a difference.” – Barack Obama
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