For the past few months, ever since detailing out the organization of my financial accounts, I’ve been considering whether I should simplify and consolidate a little more.
The real truth, though, is that I mostly like having numerous accounts for different saving purposes. It takes some extra time, but I feel that it’s time well spent in helping me reach my savings goals.
Since drawing that account diagram, I’ve opened up yet an additional online savings account and certificate of deposit, as some of our goals have shifted a little. I also have a few additional credit cards that I actively use to earn rewards that I plan to use toward travel in the future.
Is it all just too much? How many accounts are just too many?
I’m mostly going to blame the IRS for requiring so many different accounts for different purposes. These each require different tax rules and tax treatment.
For tax reasons alone, I have the following separate accounts:
- Traditional IRAs
- Roth IRAs
- Health Savings Account
- 529 college savings plans
None of these accounts could be consolidated, other than the multiple 529 plan accounts (if I chose to name just one beneficiary other than my 3 kids separately…which I guess would require me to pick my favorite? Because, today I could totally do that, but eventually my mom-guilt would kick in).
Realistically, I could save for all of these goals in one basic investment or savings account, but the tax benefits are substantial and far outweigh the trouble of dealing with multiple accounts with varying rules.
The 401(k) and IRA accounts are designated for retirement savings only, and they all have significant penalties for withdrawing funds before retirement age (subject to some exceptions of course). Although it can be difficult to balance funding retirement and more current needs, this is actually a good thing. It ensures that the funds aren’t used before the time that they are intended to be used.
HSA accounts have even steeper penalties for early withdrawal than retirement accounts, but even more tax benefits. Although the purpose is mainly for medical expenses, this account can also be used as part of a sound retirement plan. After age 65, your HSA can be treated like a traditional IRA.
Having these accounts separated helps to be able to quantify my longest-term savings goals including retirement and college funding and track my progress toward those goals.
OTHER SAVINGS ACCOUNTS
Aside from the tax-advantaged accounts, I have specific purposes for keeping other accounts separate as well. My other accounts include:
- Basic savings account (linked to my checking account)
- Online savings accounts
- Certificate of deposit
- Brokerage account
My basic savings account is used more as a buffer for spending and to accommodate occasional larger than normal spending from my checking account. Often this is due to prepaying for my kids’ sports and activities for the year, or for larger than usual expenses such as home repairs or improvements. It reduces stress when I quickly need to transfer extra funds into my checking account with short notice since it’s linked to my main checking account. However, this savings account earns .01% interest annually, so I minimize the amount of cash kept in it.
I prefer to keep my emergency fund separate from all other funds, specifically in a separate online saving account earning a little over 1% interest. Funds from this account would only be used in the case of a true emergency, such as a job loss, illness or major required home repair.
In my other online savings account, I keep my remaining funds allocated to many different savings goals such as travel, home projects, and holidays. Although these funds are all in the same account, I keep track of how much I’ve allocated to each category in YNAB.
My short-term certificate of deposit is where I currently keep a chunk of money that is set aside for a major home improvement project which will likely begin next spring. I’m able to earn just a little bit more on it this way and ensure the money doesn’t get used for anything else.
Lastly, my brokerage account holds funds for other long-term savings goals. Because the money is fully invested in the stock market, it is subject to a lot of volatility. Therefore, it is solely for goals that are past five years into the future and there is definitely some risk involved.
WHY I KEEP EVERYTHING SEPARATE
While my organized system keeps me from having to spend too much time regularly tracking my finances, more accounts definitely add more time to the process. Is it worth it? Absolutely.
I’m a very visual person, so being able to view my money broken down from totals is essential for me. I’m much more likely to spend on things that I don’t value as much when I don’t have clear goals for that money.
Having separate money buckets not only encourages me to save more but also decreases stress when I spend money as well.
For example, I absolutely love having a separate Health Savings Account for medical expenses. When my son crashed on his bike last weekend and needed stitches, I knew that I had a fully funded account meant to be used just for this exact type of situation and didn’t have to think about the cost at all.
As another example, we love to travel (although we haven’t traveled nearly as much since our time as expats in Asia). I work hard to minimize other expenses that I don’t value as much (such as groceries) so that I have more money to spend on travel. And so, I am able to spend guilt-free on things that are nonessential but provide so much joy to me.
You likely already have many of the tax-advantaged accounts set up separately, but if you don’t already have separate savings buckets for your other money goals, I highly recommend it. It will definitely change the way you save and spend!