Essential Accounts for Managing Your Finances: The 8 Must-Have Checklist

When it comes to managing your finances, having the right accounts in place is crucial. Different types of accounts serve different purposes, and by understanding each of their functions, you can be sure you are making the most of your money. In this post, I will provide a comprehensive list of the key accounts that I recommend you have. By maintaining these accounts, you will have all the tools necessary to effectively manage your finances throughout your career.

Checking Account

The first type of account I'll cover is a checking account. A checking account should be used for day-to-day transactions. It is typically linked to a debit card, allowing you to easily make purchases and withdraw cash. If you use credit cards, this account will be the account you make payments from. You should ensure that your checking account has enough funds to cover your monthly bills, credit card payments, and other similar expenses.

High Yield Checking

A high-yield checking account is an account that serves a similar purpose to a regular checking account but with the added benefit of earning interest on your balance. It offers a higher interest rate compared to traditional checking accounts, allowing your money to grow while it sits in the account. Like other high-yield accounts, it may come with certain requirements, such as maintaining a minimum balance or making a certain number of transactions per month to earn the higher interest rate. Despite these requirements, a high-yield checking account can be beneficial for those who want to earn some return on their money while keeping it accessible for everyday expenses. You won't want to keep too much money in here though. The rest should be kept in a traditional savings account.

Savings Account

A savings account is designed to hold any cash not kept in your checking account. Unlike a checking account, a savings account typically yields a low, (but higher than a checking account) interest rate on your balance. This is the perfect account for your emergency fund and saving for any near term future goals like a house or vacation.

High Yield Savings

Just like checking, there is also a high-yield account for savings. This account offers a higher interest rate compared to a normal savings account. The higher interest rate means that your money can grow at a faster pace. This can be more beneficial for long-term savings goals because it will allow you to grow your money at a faster pace. However, high-yield savings accounts may come with certain requirements, such as maintaining a high minimum balance to qualify for the higher interest rate.

Roth IRA

It's time to look at investing accounts. A Roth IRA (Individual Retirement Account) is a type of retirement savings account that provides a major tax advantage in retirement. It's designed to allow you to contribute income that has already been taxed, which means that once you retire, you can make withdrawals that are completely tax-free. This feature makes it a highly valuable long-term investment tool. Because tax free growth is so powerful you are limited to only a small amount each year. The limit for 2024  is $7,000, or $8,000 if you are 50 or older. There is also an income cap for this account. You can find more info about that here as well as legal ways to get around it.

Another benefit of a Roth IRA is that it's a personal account, meaning it's not tied to your employer like a 401k. This gives you freedom and control over your investment choices. Within your Roth IRA, you can select from a variety of investment options to suit your risk tolerance and financial goals, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs).

Furthermore, because the contributions to a Roth IRA are not tax-deductible, a Roth offers you the flexibility of withdrawing your contributions at any time without penalty, which can be useful in case of financial emergencies. This means that if you put in $5,000 and it grows to $50,000, you can take out up to $5,000 leaving in the remaining $45,000. However, to get the most out of this account, it's best to let the funds grow and compound for as long as possible.

401k

A 401k is a retirement savings account sponsored by employers. It's a powerful vehicle for retirement savings due to its tax advantages and potential for employer matching. When you contribute to a 401k, the contributions are made with pre-tax dollars, reducing your current taxable income. This means you pay less income tax now and defer those taxes until you withdraw the money in retirement.

A major advantage of a 401k plan is many employers match a portion of their employee's contributions, essentially providing free money towards your retirement savings. The specifics of matching contributions can vary widely among employers. Some may match dollar for dollar up to a certain percentage of your salary, while others may match a percentage of your contributions. Regardless of the specifics, it's important to contribute at least enough to get the full employer match, as this is essentially a 100% risk-free return on your investment. You can't find that anywhere else! Just like the Roth IRA, there is a limit that you can contribute to a 401k. This limit is $23,000 or $30,500 with the $7,500 catch up if you are 50 or over.

Roth 401k

A Roth 401k combines features of a traditional 401k and a Roth IRA, providing another excellent option for retirement savings. Like a traditional 401k, it's an employer-sponsored plan, meaning you can only contribute to a Roth 401k if your employer offers this option. However, unlike a traditional 401k, contributions to a Roth 401k are made with after-tax dollars, similar to a Roth IRA.

The advantage of this is that while you won't get a tax break on your contributions now, your money grows tax-free, and withdrawals after the age of 59.5 are also tax-free. This can be particularly beneficial if you anticipate being in a higher tax bracket in retirement than you are now. If you are young and your money has a long time to compound, a Roth 401k is probably the way to go.

Health Savings Account

A Health Savings Account (HSA) is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. A HSA gives you triple tax savings:

• Contributions to the HSA are tax-deductible, reducing your gross taxable income.
• The funds within the HSA grow tax-free, allowing for potential appreciation over time.
• Withdrawals from the HSA used for qualified medical expenses are not subjected to tax.

Given that the average American couple spends $315,000 on medical expenses during retirement, this is a great account to fund to get some big tax savings.

Taxable Investment Account

A taxable investment account is a general investment account that does not offer specific tax advantages like retirement accounts. It allows you to invest in various assets such as stocks, bonds, and mutual funds. Any capital gains or dividends earned in a taxable investment account are subject to taxes. If you have any idle cash or you've maxed out your retirement accounts, you may want to contribute to this account. If you plan on retiring before 60, you may want to think about having this account funded so you have some money at your disposal while you are below the age where you can access your retirement funds without penalty.

Net Worth Tracking Tool

The final account is not so much an account but a tool to keep your financial life in order. A net worth tracking tool is an incredibly useful tool for monitoring your overall financial health. It provides a comprehensive view of your financial situation and helps you track your financial progress over time. A good tool I recommend, and personally use, is Empower (Previously Personal Capital). It's a great tool that shows you your net worth, tracks your spending, breaks down your investments, and much more.

Conclusion

Having the right accounts in place is crucial for financial success. By maintaining key accounts such as a checking account, savings account, Roth IRA, 401k, taxable investment account, and a net worth tracking tool, you will have the necessary tools to manage your finances throughout your career and work towards achieving your financial goals.