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Organizing Your Finances Part 1: Getting Your Bank Accounts In Order

By Erik Folgate

This week, I am going to write a five part series about organizing your finances.  Many people get on the New Year’s resolution kick at the beginning of the year, so I thought this would be a good series to help people get their money in order to achieve their financial goals.  In order for a goal to be achieved, there has to be a strategy.  Strategies must be well-planned and organized or else the strategy is nothing but a theory.  You want to start saving more money, pay down debt, invest wisely, but what is the first step?  The first step is organizing your money. 

K.I.S.S.

This stands for Keep It Simple, Stupid.  This is my philosophy for organizing my money and investing.  As soon as you start confusing yourself or losing track of where you parked your money, trouble is soon to come.  My suggestion is categorize your money into “money I use every day”, “money I am saving for the next 6 – 12 months”, and “money I am saving for the long-term”.  Once you make your allocation for this money, you are ready to organize your bank accounts. 

1.  Money I Use Every Day

This is your checking acount money — the money you use to pay bills and buy necessities for living every day.  This can also include entertainment and “blow” money.  “Blow” money is money that you use for whatever you want.  It has no category.  My suggestion is to keep two checking accounts.  Keep one account that only pays bills and buys necessities.  Keep another account for going to the movies, eating out, and buying miscellaneous stuff.  You don’t need a bank account for this money, because you’ll be using it up each month, but it is up to you.  Personally, I keep it socked away somewhere in my condo.  When opening a checking account, make sure you pick a bank with a “no fees” checking account.  There is no reason why you should be with a bank that charges checking account fees.  If your bank charges you fees for your checking account, then you probably still dial up to the internet and take pictures with a 35mm point-and-shoot camera. 

2.  Money I save for 6 to 12 months

This is money that you save for a big expenditure like a new TV, a vacation, a down payment on a house (this might be more like 2 – 3 years), or any other non-necessity item or service that you want to buy in the near future.  In this category, you want the money to earn some interest, but you won’t get rich off it.  You don’t want to put this money in a mutual fund, because mutual funds are built for a long term investment, so you don’t want the chance of losing money over the next year.  I suggest putting this cash in an online savings account.  Online savings accounts are making somewhere in the 4.75% - 5.25% interest range.  Again, you won’t get rich off the interest, but at least your money isn’t sitting under your mattress.  Don’t bother with brick and mortar savings accounts.  Unless you put $100,000 in there, the interest rates are horrible and banks usually have minimum balances required or else they charge a fee.  Some of the best online savings accounts are Paypal.com, http://www.emigrantdirect.com>Emigrant Direct, and ING Direct.   Pick one account and stash money a fixed amount of money into it after every payday.  Remember, the online savings account require about two days to transfer the money into your checking account.   

3.  Money I want to Invest For the Long-term

This is money that you are not going to touch for AT LEAST five years.  Preferably, this is money that you are going to forget about and use for retirement or a financial goal ten years down the road.  My recommendation is to stick to one account when you first start investing for the long-term.  Check out my article on 401(k)’s and IRA’s.  This should help you figure out the difference between the two if they confuse you.  Once you start making more money, you can always open up a couple of mutual funds with good ten year track records for rate of return.  Also, real estate is a great long-term investment, but I never suggest investing real estate unless you can buy it with cash. 

Remember to keep it simple!  There’s no need to have more than four accounts when you have a limited amount of cash.  Once you start piling up a bunch of cash, then you can get a little more creative with your asset allocation.

Part 2 will focus on pulling your free credit report, reviewing it, and analyzing it. 

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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