Having a healthy financial life means that you manage money wisely in the present and are also prepared for the future. A key to making that happen is having the right financial accounts in place.
The best accounts are tools that make success inevitable because they allow you to make more, save more, and create safety nets. In this post, I’ll review seven accounts that most individuals and families should have to stay organized, pay for unexpected expenses, fund long-term goals, and build wealth.
7 Financial Accounts You Need for a Richer Life
- Checking account
- Credit card account
- Savings account
- Retirement account
- Brokerage account
- Health savings account
- 529 savings account
Here’s what you need to know about each of these accounts:
1. Checking account
While having a checking account might seem basic, according to an FDIC survey, 7% of American homes, or 9 million households, don’t have one.
Carrying and keeping large amounts of cash just isn’t safe. If it’s stolen, lost, or destroyed in a natural disaster, you can’t get it back. Instead, everyone should use a checking account with a bank or credit union.
Think of your checking account as the Grand Central Station for your cash flow. All your sources of income go in and all your expenses and allocations go out. If you have a spouse or partner, you might have additional checking accounts so each of you can spend a certain amount any way you like.
Use an institution that offers many free services—such as online banking, online bill pay, and unlimited transfers—so you streamline money management. You can link up your checking to personal finance software or apps like Quicken, Mint, or Personal Capital to easily track your spending and stick to a budget. Otherwise, you’re stuck with a manual system that can be difficult and time-consuming.
A podcast listener named K.G. says, “Per your advice, I have $15,000 for emergencies stashed away in my checking account, but it only earns a few cents in interest a month! I’ve seen a few banks offer large bonuses if you open an account, deposit new money, and satisfy a few other conditions. Is there any downside to opening these accounts, grabbing the free promo cash, and then closing the account once the conditions are met?”
Thanks for sending in your question, K.G. Using a reward checking account is a great way to make your money work harder for you. Many pay an annual percentage rate as high as 2% to 3% on all or a portion of your balance when you meet qualifications.
For instance, you may be required to make a minimum number of debit card purchases each month, have at least one direct deposit, and sign up for digital statements. These allow the bank to save or earn money so they can pay out higher interest rates to customers. If you don’t meet the requirements, you still earn interest, but at a much lower rate. Other than the hassle of switching banks, there’s no downside to taking advantage of rewards checking promotions.
2. Credit card account
Most Americans have an average of two to four credit cards, depending on whether you include those who have no cards. I have 6 personal cards and one business card, spread across all the major brands: Visa, MasterCard, Discover, and American Express.
I get cash back rewards on my American Express, but it isn’t accepted at some places or in some countries. I have an Amazon Prime Visa that gives me 5% back on all purchases at Amazon.com.
If you travel overseas or make purchases from merchants outside of the US, you should have a card that doesn’t charge foreign transaction fees. So, consider how different cards can help you achieve your financial goals, like saving money on different types of purchases you make regularly.
Your online purchases should only be made with a credit card—never use a debit card. A cybercriminal can use your debit card information to instantly drain your bank account. But if your credit card is compromised, the most you’d have to pay is $50.
There’s no limit to the number of cards you can or should have. But I recommend having at least two, so you have a backup if something goes wrong with one of them. And to have as many as you feel comfortable managing and will benefit your financial life.
See also: 7 Micro Habits That Create Financial Success
3. Savings account
While checking accounts come with unlimited transactions, that’s not the case with a savings account. You can make as many deposits as you like into a savings account, but you’re typically limited to 6 withdrawals per month.
Savings accounts are the perfect place to stash money for short-term goals like holiday spending, taking a vacation, or buying a car. You can even have multiple savings accounts for different purposes.
A savings account is also the best place for your emergency fund, which is a financial safety net that everyone should have. Think about your emergency money as insurance against life’s unexpected expenses, such as a big car repair bill, a last-minute plane ticket, or being suddenly out of work.
Figure out how much you spend each month on necessities and bills, then multiply that amount by three months. That’s the minimum amount you need to keep on hand and never touch—except in the case of a dire emergency.
Keeping your emergency funds in savings separates it from the rest of your money and earns more interest than you could with a checking account. While it can be tempting to invest your emergency money for higher returns, don’t do it. Keep that bucket of money completely safe from risk so the full amount is there when you need it.
You can open a savings account at the same place as your checking, or use a different institution. Consider a high-yield savings that pay more interest than a typical savings. Use the free Online Bank Comparison Chart to compare the best places to save and earn more money.
4. Retirement account
In addition to having the right banking accounts and products, everyone should use a tax-advantaged retirement account to invest money on a regular basis for retirement. Even if you want to work up until the day you die, you may not be physically or mentally healthy enough to do it.
Social Security retirement benefits can help pay your bills, but the average payout is just a little over a $1,000 per month. To be comfortable you’ll need your own investments to fund retirement, which could last for decades after you stop working.
Since retirement accounts cut your taxes, they allow you to contribute and accumulate as much as possible. The most popular retirement accounts are offered by employers, such as a 401k, 403b, or 457 plan. Many companies include matching benefits, which pays additional contributions when you invest your own money.
If you don’t have a job that offers a retirement plan or are self-employed, just about everyone qualifies for an IRA or Individual Retirement Arrangement. And if you work for yourself, take advantage retirement accounts for the self-employed, such as an IRA, SEP-IRA, or Solo 401k. You might even qualify to use more than one of these terrific accounts.
See also: Starting a Business? Tips to Make Money on the Side
Just be sure that you won’t need the money before the official retirement age of 59½. Taking early withdrawals typically comes with a 10% penalty in addition to income tax on any amounts that weren’t previously taxed.
By the way, if you want more information about the pros and cons of different types of popular retirement accounts and the best places to get them, download the Retirement Account Comparison Chart, a free one-page resource.
5. Brokerage account
A podcast listener named Natasha C. says, “It seems like life can throw so much your way and it would make sense to invest in a non-retirement account so you don’t have to pay an early withdrawal penalty if you need the money for an emergency. Do you think there’s any benefit to investing without using a retirement account?
Thanks for your question, Natasha. Retirement accounts penalize you for taking early withdrawals so you won’t touch it until retirement. However, if you don’t like that consequence, consider using a Roth IRA. Your after-tax contributions (but not earnings) can be withdrawn at any time with no penalty.
My recommendation is to max out at least one retirement account every year and to also have emergency savings in the bank. If you accomplish those key financial goals and still have more to invest, use a regular investing or brokerage account.
You can contribute an unlimited amount each year to a brokerage and withdraw money at any time without penalty. The downside to a brokerage is that you’ll owe tax each year on your account gains.
Not getting any tax breaks doesn’t make using a brokerage a bad idea. It’s simply less tax-efficient and more expensive compared to the benefits you get from investing through a retirement account.
See also: A 5-Point Checklist for How to Invest Money Wisely
6. Health savings account (HSA)
An HSA is a special account that allows you to pay qualified medical expenses on a pre-tax basis. To be eligible for this account, you must first be enrolled in an HSA-qualified high deductible health plan (purchased on your own or through an employer).
Health insurance with a high deductible reduces the monthly premium, and therefore has become more popular. But these plans aren’t the right choice for everyone. They work best when you're in relatively good health and aren't likely to spend the full deductible each year.
The beauty of an HSA is that contributions are deductible on your tax return, even if you don’t itemize deductions. Your savings can earn interest or grow in investments, such as mutual funds. And distributions of contributions and earnings are completely tax-free, if you spend them on qualified, unreimbursed medical expenses.
Depending on your income tax rate, using an HSA could give you a 20% to 30% discount on medical expenses. They include a wide range of costs you might incur until you meet your annual deductible, or that simply aren’t covered by your health plan, such as doctor visits, dental checkups, prescription glasses, and prescription drugs.
Just like with a retirement account, you should never put money in an HSA that you might need for everyday expenses. Withdrawals spent on non-qualified expenses are subject to income tax plus a hefty 20% penalty.
There’s no income limit to have an HSA, but there are annual contribution limits. For 2018, you can contribute a total of up to $3,450 to an HSA when you have insurance just for yourself, or $6,900 if you have a family plan. And if you’re age 55 or older you can contribute an additional $1,000.
You can make tax-deductible contributions at any time during the year, even up to April 15 for the previous tax year. But you’re never required to make contributions to an HSA or to spend it.
Additionally, after your 65th birthday, you can spend HSA funds any way you like. If you use them for non-qualified expenses, such as everyday living expenses or travel, you’d owe ordinary income tax, but skip the 10% penalty.
In other words, an HSA that you keep long enough will eventually mimic a traditional retirement account. That’s a great reason to max it out every year, even if you don’t expect many medical expenses.
If you qualify for an HSA, they're available at many banks, credit unions, brokerages, and specialty institutions. Most are convenient to use and offer paper checks, a debit card, and online banking. Use the HSA Cheat Sheet to learn more and find the best places to open your account.
7. 529 college savings account
A 529 plan is a tax-advantaged account that allows you to save and invest for education expenses. Its name comes from Section 529 of the Internal Revenue Code, which regulates them.
You make contributions that can be withdrawn tax-free to pay for qualified education expenses for you, a child, or another member of your family. The funds can be spent at most accredited institutions, such as colleges, universities, graduate schools, vocational schools, and even some foreign schools.
You allocate 529 funds in a variety of investment options and earnings are exempt from tax, when used for qualified expenses. These might include tuition, room and board, books, fees, and equipment. Starting in 2018, you can spend up to $10,000 per year tax-free on education expenses for a younger child who attends a public or private school.
The funds in a 529 plan belong to the owner and can only have one designated beneficiary who is (or will be) the student and has a Social Security number. If you want to save for more than one child, you generally must open an account for each of them. However, you can generally change a 529 beneficiary to another member of the family in the same generation without triggering tax consequences.
Most states offer at least one 529 plan and may provide a state income tax deduction or credit for your contributions. However, 529 contributions can’t be deducted from federal income taxes.
Everyone can use a 529 plan because there’s no income limit, age limit, or annual contribution limit. Depending on the plan, there may be lifetime contribution limits; however, many plans allow you to rack up more than six figures per student. An added benefit is that qualified withdrawals don’t get factored as income in the calculation for financial aid.
Just remember that if you spend 529 funds on non-qualified expenses, you’ll be subject to income tax, plus a 10% penalty, on the earnings portion. So, don’t save more than you believe you’ll need to spend on the total cost of education.
To sign up for a 529 you can go directly to the plan’s website or use a financial advisor. Set up automatic contributions from your bank account or direct deposits from your paycheck.
No matter if you contribute $10 a month or $1,000 a month to a 529 plan, the sooner you get started, the easier it will be for you and your family to pay for college.
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