Choosing a Bank Account - Part 2
In part one of this series, we looked at what the differences there are between the most common types of bank accounts. Today we're going to build on from that, and look at how you an organise your money to be most effective.
As I said last time, this was a process I went through with my wife. Before that, I hadn't changed anything about my banking for almost 20 years since my mum set up a kids account for me. She was in a similar situation, so we first need to decide what was most important in how we managed our money. We didn't have a lot, but we were trying to save like anything for a house deposit.
A rough list of our priorities is as follows:
- Fast access to all of our savings, in case of emergency.
- High interest rate.
- Earn interest on as much of our savings as possible.
- Instant access to enough money for day to day purchases.
- Good online banking.
- VISA/MasterCard Debit Card. (We didn't want a Credit Card, but wanted to be able to shop online, etc)
- Low/no fees.
We also looked at some things that weren't so important to us, such as:
- Cheques. Neither of us had ever written one, and didn't expect to any time soon!
- In branch transactions. We were both happy to use Internet Banking as the exclusive method of managing our money.
With our priorities set, we could finally look at how we would organise our money.
We decided to have three accounts to store and manage our savings. We gave them the following names:
- Available Money
- Don't Touch Savings
This is our transaction account. It earns no interest, but it never has very much money in it. Usually less than $100, unless we have specific things we need to buy. And even then, the money usually only stays in this account for a very short time - from a few minutes to a few days.
This account is linked to our Debit cards. Minimising the amount of money linked to the cards is also good practice for minimising risk - if our card details were compromised, only a small amount of money could be used fraudulently.
This is a savings account that holds enough money for us to live on and spend at our discretion and according to our budget. We like to keep enough to last until at least 2 weeks after our next pay is due. This includes enough for upcoming bills and other repayments. Keeping a little bit extra here 'just in case' is not a problem as it is still earning interest.
This is also the account we have our wages paid into. That way, as soon as we get paid, we are earning interest. No more forgetting to transfer the wages each month, and missing out on a month's worth of interest.
Don't Touch Savings
As its name suggests, this is the account that we "Don't Touch"! Money transferred into this account stays there until it is needed for our savings goal - in our case that's a family holiday, a car or a house deposit. Each pay period, we see how much we have left in Available Money, look at our budget and upcoming bills, and then transfer as much as we can afford into Don't Touch Savings.
This is the account where we wanted to have the highest interest rate possible, because this is where the bulk of our savings ends up. When we were first starting out, this was a similar size or possibly even smaller than our Available Money account, but as we have consistently followed the steps above, we have been able to grow this towards our goals. What's more, we have been able to stick to our commitment to never make any withdrawals from this account, so it really has been Don't Touch.
You might think we could use a Term Deposit for this, since we aren't making any withdrawals. There are a few reasons we didn't do that, especially not initially.
- You can't deposit more money into a Term Deposit part way through.
- As we were just starting out, we needed everything to be available in case of an emergency.
Where to put it?
For us, it was important that our Everyday and Available Money accounts were at the same bank. We needed to be able to instantly transfer money to be able to spend it on immediate needs. Food, bills, everyday travel, impulse purchases, etc. Selecting a bank for these two accounts was actually based more on the features of the Everyday transaction account, rather than the interest rate or other fetures of the Available Money savings account.
We decided that The Don't Touch Savings account could be at any other bank. Because this money was only to be spent on larger/planned purchases or investments, we could always make sure we transferred anything back to Available Money in time, taking into account the 2-3 day delay of transferring between banks. Keeping this account separate has also allowed us to almost 'forget' about it. We don't see the balance every few days when we log into our regular internet banking, and so we aren't tempted to spend it. This has also allowed us to select the best possible interest rate available.
In part three, we will look at some specific financial institutions and their interest rates and features. We will also look at some possible variations on this basic structure, based on individual circumstances.