07 - Checking, Savings, and Beyond

Is all your money piled into one checking or savings account? In this episode, Daniel and Shanna explore the financial toolbox of different bank accounts. We’ll explain the specific jobs of Checking, Savings, Money Market, and CD accounts. Learn how to use this "bucket system" to organize your finances, protect your emergency fund, and make your savings work harder for you by matching the right account type to your specific financial goals.

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Transcript

Episode 7 | Checking, Savings, and Beyond

00:00:00 Daniel Hill: So, Shanna, let's imagine a young couple who is diligently saving for a big goal. Let's say a down payment on a house. They're doing everything right. They pay themselves first. They've cut back on unnecessary spending. And every month a good chunk of money goes into their savings account.

00:00:19 Shanna Browning: And that is so great. Good for them. They're building great building great, great, great habits. So what's the issue?

00:00:27 Daniel Hill: The issue is that all their money, their emergency fund, their vacation fund, their house down payment fund is all piled into one single savings account.

00:00:38 Shanna Browning: Oh, yeah. That one big bucket approach. Yeah, yeah, I see it. I hear what you're talking about. I see that problem. It's not earning much, and it's really probably a little too easy to dip into that for the non-housing things.

00:00:52 Daniel Hill: Exactly. They're running into a classic financial dilemma. You need your money to be safe and accessible, but you also want it to grow. And the solution is realizing that not all savings accounts are created equal.

00:01:07 Shanna Browning: That's right. They're not. And it's about using the right tool for the right job. And that's exactly what we are going to talk about with you today.

00:01:24 Daniel Hill: Welcome back to this week's episode of Making Sense of Your Cents. I'm Daniel Hill.

00:01:29 Shanna Browning: Hi, friends. And I'm Shanna Browning. And today we're going to talk about those fundamental building blocks of your financial life, your bank accounts.

00:01:38 Daniel Hill: That's right. We're going to go beyond the basics of just checking and savings to explore the different tools available and how to build the right combination of accounts to make your money work harder for you.

00:01:51 Shanna Browning: I think you said it perfect, the right combination. So let's start with that. The account that everyone knows and uses every day. Our checking accounts. So what's the primary job in our financial lives of a checking account?

00:02:03 Daniel Hill: Your checking account is your financial hub. It's your cash flow command center. Its primary purpose is to handle your day to day transactions with maximum liquidity. Liquidity is just a fancy word for how easily you can get to and use your money.

00:02:20 Shanna Browning: Liquidity. Big fancy word. Big fancy word. So basically what you're saying is this is where your paycheck goes gets deposited. It's where you pay your bills from either through your debit card, writing checks or online bill pay.

00:02:33 Daniel Hill: Exactly. It's designed for high volume activity. Because of this, most checking accounts are not designed for growth.

00:02:41 Shanna Browning: So it's a pass through.

00:02:42 Daniel Hill: Exactly. They typically earn very little to no interest at all. Keeping a huge amount of cash in your checking account is often a mistake because that money isn't working for you. It's losing purchase power to inflation.

00:02:55 Shanna Browning: Okay, so what do people look for when you're just choosing a checking account?

00:02:59 Daniel Hill: The most important thing to look for are low to no monthly maintenance fees. Many banks, including First Century, will waive the monthly fee if you meet a minimum balance requirement or set up regular direct deposit. You also want to look for large fee free ATM network and a user friendly online and mobile banking platform exactly like the one we have. The goal for your checking account is convenience and low cost.

00:03:26 Shanna Browning: So the fee free ATM network that you mentioned. So that means that like I could use my debit card somewhere else, right. With no fee for that. Okay.

00:03:35 Daniel Hill: Gotcha. Yes. Okay. A lot of your gas station ATMs that are inside the the gas station convenience store, they're going to charge you a service fee to use your debit card at that ATM.

00:03:49 Shanna Browning: I gotcha.

00:03:49 Daniel Hill: You. So when using your debit card, what you're going to want to look for is to find an ATM that's on the network. Your ATM is on.

00:03:58 Shanna Browning: And that's on the back of the card. Yeah. Perfect. Perfect. That's good to know. All right, so, um, let's talk a little bit about, um, the checking account is for spending, right?

00:04:10 Daniel Hill: Absolutely.

00:04:10 Shanna Browning: So let's talk about savings and why most people just have one savings account. But there's actually a few different tools that fall under this category. Right.

00:04:20 Daniel Hill: That's right. They each serve a different purpose. The most common one is the standard savings account. It's usually the first savings account anyone opens. It's liquid, it's safe. And it's a great place to start building your emergency fund. The key benefit of a standard savings account anyone opens is the fact that you can transfer money in and out from your checking account easily.

00:04:46 Shanna Browning: Gotcha.

00:04:47 Daniel Hill: However, like the couple in our story, the trade off for that convenience is typically a lower interest rate compared to other savings options.

00:04:55 Shanna Browning: I got you. So not great interest rates, but Convenience and accessibility. Exactly. I got you. All right, so if you want to earn a little more in your savings account, what's that next step?

00:05:07 Daniel Hill: The next step from that is what we call a money market account. A money market account is like a hybrid between a checking and a savings account. It typically offers higher interest rate than your standard savings account. Often it's on a tiered rate, so the more money you have in that account, you earn a little higher rate. Um, but it still provides relatively easy access to your money. You can often write a limited number of checks or even use a debit card.

00:05:36 Shanna Browning: Can you transfer money market and to checking accounts too? Is it kind of the same way? Yes. Okay. Yes okay. So it's it is a hybrid. It's a hybrid account. That's great. So it also could be for a um it's great for a home for a fully funded emergency fund, for example, if you want that money to be earning a competitive interest rate, but you still need to get it. get it. Maybe something like your car breaks down.

00:06:01 Daniel Hill: Exactly. It's a perfect use case for that. You're getting a better yield without sacrificing the liquidity that you need for true emergencies.

00:06:11 Shanna Browning: Gotcha. So what if you have money that you know you don't need to touch for, I don't know, six months? So what do you do then.

00:06:19 Daniel Hill: For that specific period of time? That's when you should consider a certificate of deposit or a CD. A CD is a type of savings account with a fixed term and a fixed interest rate for that term. You agree to leave your money in the account for a specific period of time, like you said, six months, one year, five years. And in exchange for that commitment, the bank pays you a higher interest rate than a standard savings or money market account.

00:06:47 Shanna Browning: I got you. So pretty clear trade off, right. You're giving up that quick access, that liquidity, that quick access of of cash. But you're getting a higher guaranteed return.

00:06:59 Daniel Hill: Exactly. If you pull the money out before the term is up, you'll typically pay a penalty. This makes CDs a fantastic tool for specific time bound goals. If you know you're buying a car in two years, putting that money into a two year CD is a great way to earn more interest on it. And just as importantly, to wall it off so you are not tempted to spend it.

00:07:22 Shanna Browning: Great information.

00:07:23 Daniel Hill: So we have the checking account for daily cash flow, a savings or money market for liquid savings and emergencies, and CDs for long term savings goals. So how do we advise people to put all this together into a cohesive system?

00:07:41 Shanna Browning: Well, I think like you and I started talking at the beginning of it, it's kind of like instead of one big bucket, we're in a series of buckets, right? Each with a specific job. You're checking account is your bill pay and spending bucket, your pass through account. Right. Right. And so you should only keep enough cash in here to cover your monthly bills, plus a little bit of a small buffer. I would recommend about one point five... one point five times your monthly expense.

00:08:10 Daniel Hill: And the overflow from that bucket. Where does that go?

00:08:14 Shanna Browning: Well, we could look at that in a couple of ways. So the overflow would just either transfer into your savings or your money market account, whichever is your emergency and short term goal bucket. So right, this is where you would build up the three to six months of your living expenses that we hear so much about as an emergency fund. Right. But you need it to be liquid. So again, liquid being quick access to cash. Once that emergency fund is full, then you start filling up your other buckets.

00:08:45 Daniel Hill: And that's where the CD comes in.

00:08:48 Shanna Browning: Absolutely. That's your third bucket and it's your specific goal bucket. And this is perfect for the CDs. So as you talked about with the car let's look at maybe a house payment that you plan to make in three years. Right. Or you want to put money down towards your house. You can open a three year CD and we offer those, other places offer them. But you want a long term situation. So you do a three year CD on that one. Or let's say you're saving for a vacation next year. You can use a one year CD, twelve months. By matching the CD term to your goal plan, that timeline, you maximize your earning to create a clear finish line.

00:09:30 Daniel Hill: I just absolutely love the bucket analogy.

00:09:32 Shanna Browning: I know.

00:09:33 Daniel Hill: It's a simple visual way to give every dollar a job and use the right account for that job. It's a strategy for financial organization.

00:09:42 Shanna Browning: It really is. And CDs are like that, right? That's what we talk about. You may not be able to pull that money out for that term, but you can add money as you go along, just like a savings account, just like a money market, right? It's the same thing. It's great. So it's what it's really what it's all about. It's moving from a chaotic one big pile of money approach to really an organized system where your money is strategically placed to serve you best.

00:10:09 Daniel Hill: Absolutely. Great, great insights here, but it's time to put this knowledge into action with this week's actionable tip.

00:10:17 Shanna Browning: Yay! Actionable tips! We love that. So your action item is the right bucket challenge. Simple diagnostic test to see if your money is in the right place to achieve your goals.

00:10:32 Daniel Hill: Absolutely. First, grab a piece of paper on one side of the paper  write down your top two or three savings goals and their timeline. So for example, emergency fund... that's that's going to be an ongoing timeline. Yeah. Um, new car maybe two years and then a Europe trip nine months. I would love to be going to Europe in nine months.

00:10:54 Shanna Browning: Who doesn't love a good Europe trip? All right. And then what we want you to do is we want you to go into your online banking, and we want to look at we want you to look at your accounts. And now draw a line from each goal on your paper to the account where the money for that goal currently lives.

00:11:12 Daniel Hill: And this is the moment of clarity, the moment of truth. That's right. You might see that your new car two year fund is sitting in a standard savings account and earning very low interest rate. The visual of that mismatched line is a powerful prompt. It shows you that this long term money isn't working as hard as it could be.

00:11:32 Shanna Browning: And we want it to do that. We want your money to work for you. So you might realize your emergency fund is kind of actually and accidentally locked away in a CD where you can't get to it without a penalty. So the goal of this exercise isn't to open or close any accounts today. It's simply to identify those mismatches.

00:11:56 Daniel Hill: Yes, seeing those mismatched lines gives you a clear roadmap. Helps you see where you could be using a different tool, like a CD or a money market account, to better align with your financial goals.

00:12:07 Shanna Browning: Again, your goals, right? It turns your account list from truly being just kind of a simple statement that you just look at your accounts online, but it turns it into a strategic plan.

00:12:18 Daniel Hill: That was a fantastic breakdown, Shanna. Next week we're going to be talking about one of the biggest financial goals that many people have that is buying a home. Make sure you subscribe to Making Sense of your Cents wherever you listen and send us your questions at podcast@fcbtn.com. I'm Daniel Hill.

00:12:40 Shanna Browning: And I'm Shanna Browning. And as always, we want you to go out and make some Sense of your Cents.