#6 What Accounts to Open (first)
Updated: Sep 28, 2021
Why should you care about this? Simply put money is what we use to move through life and pursue the things that make us happy, in addition to take care of those obligations we might have. If we can make money work for us, then our lives are less stressful and it is easier to say yes to the things we like (like buy more ammo, or get a legitimate trigger job). If we don't learn how to make money work for us, then we will always work for money and never for ourselves. These accounts set the foundational building blocks, and can be automated to make financial life even easier. Keep in mind that everybody's circumstances in life are different, and that these suggestions come my personal experience post-divorce.
All right, so maybe you decided guns are super important/cool earlier on, and now you’re starting to think that maybe money can be too. That’s great! So, let’s begin on setting up the foundation on which to build your cash kingdom. After creating and following a budget that works for you (it should NOT punish you), making sure we’ve got the basic accounts created will be key going forward. Here’s the best part; none of these accounts shouldn't cost you a penny to open, or to maintain.
1) Checking Account
The most basic account we need is a free checking account. Some banks will do them for anybody, others contingent upon direct deposit from an employer, others with military affiliation; my point is this checking account should NOT cost you to open or to keep it open. The account should also come with a free debit card, free cash withdrawals, etc., and will allow you to use this card for anything from fuel to purchasing range memberships to buying training courses. If you opt for direct deposit from your employer, you won’t have to rush to the bank on payday to get your money as well. It also will prevent the couch and car from becoming a piggy bank and hiding money from you between the cushions.
2) Savings Account
The second account is so basic it’s pumpkin spice in the fall. The standard, no fee, low interest rate savings account. Think of this as your emergency fund account that you feed a little bit every week; enough that you’ll see it grow over time, but not impact your daily life. You'll want to feed this every payday and make a habit of it. It’s an important account to feed, but also recognize your situation; if you’ve got $4,000 of credit card debt at 22% interest counting against you, emphasizing on 0.01% interest in your savings account might not be the best long term goal if everything else in life is relatively stable. I prefer to have my savings account at a different bank, so I’m not tempted by seeing those dollars and move them over to my checking account. Definitely check out a high yield online savings account for this one, such as offerings from Ally Bank.
If your employer offers a 401K program, march down to HR right now and sign up for it. If they have a match, you should contribute as much as you can to get as much of a match out of the company. This is literally free money - IE a raise - to the future you. If your company will match up to 5% of your paycheck, this simply means that they will match you dollar for dollar up to 5% of y our salary in the account. You put in 5%, and the account grows 10%. Seriously, that’s free money. If you can afford to do this, do it to the match. Others recommend putting in more than that, but with how much we change jobs these days, I’d personally go for the maximum company match amount and nothing else, and put the rest in other accounts. This account should also be free.
Open one, period, especially if you are self employed or own a small business. This is literally an INDIVIDUAL RETIREMENT ACCOUNT - that’s what it stands for. It isn’t tied to your employer, so if you change jobs this little guy doesn’t care, and it will let you roll your old 401K over into your IRA as a contribution and not lose those gains. There are 2 different ways to set it up, the traditional way and the Roth way. The difference comes down to taxes. With the traditional, you pay taxes upon withdrawal and with Roth you fund it with post-tax dollars. What this means is there’s no taxes due once you draw on the Roth, but you’ll have to do so on the traditional. I personally have a Roth IRA, as taxes have pretty much always climbed over time - so I’ll pay less in taxes now than if I went with a traditional IRA. You can fund the roth with $6,000 per year. Some banks, such as Ally Bank, offer a Roth IRA that is literally the standard savings account with a bunch of strings (it will take over 140 years for the money to double given 0.50% interest). You can open an account with an online brokerage, such as TDAmeritrade, and open a Roth this way for some much more aggressive yields. Fun little tidbit - if you get any dividends, profits from selling a stock or fund, distributions, etc., my understanding is that they are tax free within a Roth IRA.
5) Credit Card
This is one I recommend for folks due to the frequency of accounts being compromised these days with online vendors - and the ease of getting your money back. The double edged sword of this one is pretty simple. Since you aren’t using your checking account directly for purchases, your actual money is safe if something goes wrong. And since you aren’t using your checking account directly, it’s pretty easy to go off course and spend way more than you wanted to. It does require some discipline, but it is worth it. I personally use my credit card for everything, including the automatic monthly bills I have. This essentially means I’m using my credit card like a checking account, without putting my checking account at risk of fraud. I have an Amazon Prime credit card, which gives 1-5% cash back on everything; this means that everything I purchase is 1-5% discounted at the end of the month compared to what I paid for at the store. So, if I’m going to spend the money anyway, I’ll use this in almost all cases - but if you don’t keep up on it, it will bite you in the butt, and become a burden. Stay on top of these types of accounts, as the interest if you don’t keep a 30-day rolling total of $0, you will get dinged at 14-22% interest. The more of these you open, the more complicated, stressful, and difficult life becomes, so keep it to one or two and don’t let impulse buying become a habit. These are always free to open, but these will cost you to have them if you aren’t diligent.
6) Individual Brokerage Account
So, the last one is a taxable brokerage account. Once you're debt free, putting money into savings, have your IRA maxed or are on track to, then look into opening a taxable brokerage account, probably through the same broker as your Roth IRA. With this account, you can do more aggressive, more risky investments with bigger payoffs without the chance of impacting your retirement accounts. If you happen to do really well in that quarter or year, or decide to liquidate it completely, it is very easy to move that money over to your IRA as a contribution and not lose any of that. A little thing on these sorts of accounts: capital gains are real. When you own a holding for over a year and sell it for a profit, you pay a capital gain tax instead of an income tax. The current tax rate for income is about 30%, but is 15% for capital gains (over 1 year of ownership). Don’t feel bad that you’re ‘cheating’. These accounts are also free, and I use TDAmeritrade for this account as well. They have a great education effort about finances and investing for their clients. By using the same broker as my Roth IRA, I can choose to sell from my taxable account and transfer the funds to my Roth IRA.
Disclosure - I am not compensated by any business, bank, or brokerage mentioned in any way. I am not a financial advisor. These recommendations are based on my experiences. ~Mike