Effective money management can be empowering as it helps you and your business stay afloat. Successful money management involves tracking historical records, makes you aware of your means, and aids you in planning for the future. Money management involves making smart decisions about spending, saving, and investing in order to make the best use of your well-earned money.
A startling financial reality in the United States is that 40% of Americans find themselves unable to cover a $400 emergency expense without resorting to borrowing money or selling assets. Not only this. 75% of Americans are living paycheck to paycheck, even those earning relatively high incomes. This statistic even underscores the widespread financial vulnerability many people face.
To optimize money management, I believe the concept of using multiple bank accounts is a highly effective tactic. By segregating funds into different accounts for various purposes, you can gain better control over your finances. You can simplify budgeting and enhance your ability to save for specific goals. I am truly applying the old adage here that goes “Don’t put all your eggs in one basket.”
I noticed a big shift in how much money I kept in the bank and how much better I managed it, in both my business finances and my personal finances, when I started using different bank accounts for different purposes.
Business Bank Accounts
It has long been the norm for a business to have operating business bank accounts and a payroll account. This is to keep payroll tax monies and wages separate. No matter what, the payroll money, once transferred, would not get spent.
To take it one step further, I recommend you have a third bank account for the profits the business has earned. The profits are what pay equity, liabilities, and what gets invested back into the business.
The third bank account will help you improve cash flow. After all, the profits are what you get to keep and do something with after you pay the business expenses. What you do with the profits is what can make or break your business. As you know, the profits are reported at the bottom of the Profit & Loss, or Income Statement. The Balance Sheet shows what you have left in the accounts at the end of the period. What these two financial reports don’t show is what occurred between the two. My clients often ask “Where did the profits go?”
A cash flow statement report will help to show that, but it depends on how you set up that cash flow report and how well-acquainted you become with it. Most business owners don’t look at the cash flow statement because it’s not very “user-friendly” and a little difficult to decipher.
The third bank account of profits is a simplified way to isolate the profits and ensure you know where they’re going because you’re the one in charge of managing them in this one bank account, dedicated specifically to them. From this account, you will set up automatic payments or make manual payments to:
- Owners or managing partners
I switched from big banks for many reasons and the state of the US economy. As of 2023, I have moved my business bank accounts to Bluevine, an online-only bank, also known as online banks, and I love it. For another business I co-founded, I have a joint account with my partner, which is a business checking account with Novo Bank. Both Bluevine and Novo are an online account but Bluevine was created by a community bank. I recommend at this time that you stick to credit unions and community banks. The reasoning for that goes beyond the scope of this post. Reach out to us at Yari Solutions if you have questions about it. Bluevine offers a 2.0% interest rate to eligible new customers which as they advertise, it’s 30 times more than the national average.
In personal finance, an advantage of having separate bank accounts is enhanced goal tracking. You can designate specific accounts for various financial goals, such as an emergency savings account, vacation savings, or retirement planning. Separate accounts provide a visual representation of your financial accomplishments.
I like to have an account where all income comes in. This account should provide higher interest rates. Money market accounts work well here. From this account, you will transfer to all other accounts.
A second checking account should be for paying your bills. You will have a good hold of what your cost of living is and how much of your income is going to rent and other monthly expenses by gauging how much you have to transfer here every month. This, in turn, helps you track what’s left in your income account once you transfer funds for your living expenses.
A third bank account can be an investment account that you will use to make your money work for you. In these times, putting your money in a savings account is the worst thing you can do. Inflation is eating at your money every minute it sits there.
Money should not be sitting there, it should be making you money every day. This is where you have to educate yourself on the different types of investments that will work for your short-term goals, long-term goals, and your risk tolerance. Reading and research are very much a big part of how I spend my time. If you’re not interested in doing this and don’t have the time or the inclination, pay for a service that does it for you and keeps you up to date on all things finance and investments. I pay for a few of them I trust and follow their advice even though I still like to do my research and come up with my own conclusions.
As I mentioned above, I moved my money out of big banks. I am currently using Ally Bank, an online-only bank as one of my personal accounts. I like this bank and all the different financial instruments it offers. As shown in Google, “As of 13 Nov 2023, Ally Bank offers a high-yield savings account with an APY of 4.25% with no minimum balance requirements. However, it is important to read the fine print as some banks may have balance requirements to earn the highest interest rate. The national average for this type of account is 0.46% APY, based on rates published in the FDIC Monthly National Rates and Rate Caps accurate as of 10/16/2023.1 The Ally Savings Account is a great option for anyone who wants savings tools to help save for specific financial goals or prioritizes an account that doesn’t charge [monthly fees].”
Investment & Online Checking Accounts for both Personal & Business
I highly recommend the same be done with investments. As it grows and you decide to make different types of investments, you can choose to separate funds for different purposes. In some cases, you will have to.
I recommend having at least two of the following:
- I use and recommend TD Ameritrade (recently merged with Charles Schwab) to invest long-term in stocks and to day trade or swing trade stocks, EFTs, and options. They also offer retirement accounts among other products.
- I use and recommend Robinhood for various reasons:
a) One of the ways I use it is the same as I use TD Ameritrade. I like the interface on the phone and at times when I fall below the threshold of pattern day trading and I’m only allowed three trades in five days, I like to have this second account to day trade and swing trade stocks and options. I’ve also at different times turned on and off margin investing in one or both depending on how risky I want to be.
b) I also use Robinhood to day trade or swing trade crypto. I can’t do that in TD Ameritrade.
c) Robinhood also offers a spending account with a linked debit card. The funds in the spending account are kept separate from the brokerage account. I like to use this for my teenagers and young adult children to put gas in the car, buy groceries, or buy things they need. It pays out 1.5% interest on the cash that sits there which is better than a savings account.
d) It also has a GOLD program charging a monthly service fee of $5 per month that will give you 4.65% interest. If you do the math, if you have at least $110 in there, it will pay for itself. After the $110 it becomes interest income. These are better interest rates than what a traditional bank is willing to offer.
3. I prefer to have my retirement account in M1 Finance where balancing my portfolio takes seconds using a pie chart. I easily add/remove stocks and EFTs depending on what is happening in the market. Since this platform doesn’t allow day trading or trading of riskier instruments like option contracts, it keeps me from the temptation to risk any of this money. In this case, it’s more of a choice according to my personality. I like to take big risks because I know those pay off the most but they can also lose the most. However, I keep myself from messing with my retirement money by keeping it in an account that doesn’t allow me to day trade and risk these funds.
4. Another account where I’ve put a little money I like to call “play money” is eTrade. eTrade allows trading and investing of OTCs (over the counter) instruments (very risky) and crypto-related instruments not available in TD Ameritrade nor Robinhood.
5. If you’re looking to keep your emergency fund in a very liquid and easily accessible account with a better-than-savings interest rate, money market accounts are a great option. I recommend Axos for Nationwide as one of the best money market accounts as of 2021 when I researched. A lot of money market accounts have large minimum balance requirements, but this one didn’t have a large requirement as of the time I researched. However, because of the timing of this post, I would compare these to Ally bank savings account, as previously mentioned.
6. Use your credit cards for your everyday expenses so you can (1) get cash back if they offer it, and (2) keep your money in your bank account for longer to possibly earn more interest. However, for credit score purposes, pay off your credit cards before the due date.
Tailor The Setup of Your Accounts to Your Personality
As you can see, the number of accounts and the types of accounts depend on your personality and the restraints you choose to put in place to stick to your financial goals. If you have a personality like mine, this setup of having various accounts works wonders. If you’re more disciplined and can keep your money in fewer accounts for different purposes or are just a very conservative person when it comes to finance, then the typical two accounts for both business and personal accounts will suffice.
How to Manage Separate Bank Accounts Effectively
To effectively manage multiple bank accounts, automation is a game-changer. Start by setting up automatic transfers to effortlessly allocate funds into savings or investment accounts, ensuring specific goals are consistently funded. Additionally, scheduling automatic payments for your monthly bills not only saves time but also helps avoid late fees, providing a stress-free approach to maintaining a healthy financial situation. Embracing these automated practices can streamline your financial management, allowing you to focus on your priorities without the constant worry of manual transactions. It will also improve your credit score with 100% on-time payments.
Utilizing the mobile apps and software, as provided above, can be a game-changer when managing separate bank accounts.
You also can’t forget to regularly monitor your bank statements. It is important to keep track of what goes in and out, especially as you become wealthier. As your different goals evolve, so will your budgetary plans, as keeping these in place will allow you to keep your money consistently growing.
Not to mention that these times are so volatile and banks are failing left and right. Keeping your money in separate accounts with multiple banks and investment platforms safe keeps a portion of your money even further.
In conclusion, the advantages of maintaining separate bank accounts are worthy. From enhanced budgeting flexibility to improved financial organization, the benefits extend beyond convenience. I encourage you to try out and learn more about this money management strategy and explore the ways it can contribute to a more secure and strategic approach to finance. If you take away anything, I hope you gained resources and motivation to take your money management to a new level.