My money management strategy has three major components: bank accounts, investment accounts, and credit cards.
This is not unique – I hope that your financial life includes these three components, too! However, I take a few slightly unconventional and very effective approaches that I’d like to share with you today.
If you are looking for a simple money-tracking strategy, by the way, you may want to check out my post on How I Track My Money.
Splitting expenses with a partner
Before I dive into my various accounts, I want to get this out of the way. While Hans and I share many expenses, we find it important to have our own separate financial lives (at least for now). Anytime one of us pays a bill, goes to the grocery store, covers the cost of a restaurant meal, etc., we record the expense. At the end of the month, we tally up each of our expenses and make up the difference with a Venmo payment.
We do have one joint bank account with a specific purpose – read on for details.
Bank accounts
One of my favorite money discoveries is the high-yield savings account.
Savings account interest (and certainly checking account interest) will never compare to the long-term average returns of investing in the stock market, but these are entirely different beasts. I invest as much money as I can into low-cost index funds (see next section) for Future Mikayla; there will always be a Present Day Mikayla, though, and she will always live off of her savings and checking accounts.
There are many online banks that offer high-yield savings accounts, but I use and enjoy Ally. According to the Ally website, the national average interest rate for a savings account is currently 0.06%, while Ally offers 1.25% APY (compounded daily). I am writing this during the COVID-19 pandemic, and the interest rate has, understandably, dropped. During better economic times, I have received an interest rate as high as 2%* on my Ally savings accounts.
Most checking accounts do not pay an interest rate at all, but Ally is better than that! I am currently receiving 0.10% interest rate for mine.
With Ally, you can create as many savings and checking accounts as you need to easily keep track of your money. I have 3 accounts:
- Checking: This is where my paychecks are deposited. I constantly keep my checking balance around the amount that I spend in a typical month, and move the excess to my savings/investment accounts.
- Savings: This is where I keep my emergency fund. People tend to recommend keeping an emergency fund large enough to cover at least 3-6 months of expenses. This way, you should be able to handle costs related to unexpected circumstances (job loss, medical care, etc.).
- Home Savings: This is a joint account, which Hans and I both have access to. We contribute monthly to save up for a down payment on a house. Once we find the next house and make the down payment, pay closing costs, etc., we will continue to contribute to this fund so that we are prepared for future repairs and improvements.
Note: Ally does not have physical branch locations. However, at the time of writing this, you can use any Allpoint® ATM in the U.S. without paying a fee and they will reimburse you for up to $10 at the end of each statement cycle for fees charged at other ATMs nationwide. That said, I also maintain a small checking account (I’m talking $200) with TD Bank just in case I ever find myself wanting to utilize the services of a brick-and-mortar bank.
*Future Mikayla here! 4.25% is the highest I’ve seen as of late 2023.
Investment accounts
Let’s talk about employer-sponsored retirement accounts.
I am fortunate enough to work for an organization that automatically contributes the equivalent of 5% of my salary to my retirement account, regardless of any contributions I make (or do not make), myself. From what I understand, this is very rare.
Many workplaces will match around 2% – 5% of an employee’s salary, meaning that you would need to contribute at least as much money as they are willing to match. Were this the case for me, I would definitely contribute at least what is required to get the full employer match. I hope that you do this, too – you don’t want to lose out on that free money! It’s part of your benefits package, after all.
Unfortunately, the downside to my workplace retirement account is that I only have access to a very limited number of (not very impressive) funds. Because my employer contributes to my account no matter what I do, I prioritize maxing out my Roth IRA before even considering contributing to my employer-sponsored retirement account.
But wait… what’s an IRA and how does it work?
In 2020, individuals are allowed to contribute up to $6,000 to an Individual Retirement Account (IRA), with some exceptions. I set up a Roth IRA with Vanguard, and I focus on contributing the $6,000 to this account first.
Vanguard offers a wide variety of low-cost index funds, including their Total Stock Market Index Fund (VTSAX), which has a current expense ratio of only 0.04%! Compare this to the 1%+ fees charged by many of the funds in my employer’s account, and I think it is clear why I fund my IRA first.
Another benefit of a Roth IRA is that you can withdraw contributions without penalty, so it can act as a last-resort safety net. Anything in excess of your contributions – and anything taken from a Traditional (non-Roth) IRA – is subject to penalty if withdrawn before the established retirement age.
That said, in 2020, the IRS allows individuals to contribute $19,500 to their 401(k), 403(b), or 457(b) plan, independent of the IRA contribution limits. So if you want to set aside any significant retirement savings over the course of a year, you’ll need to go with whichever of these options you qualify for and have access to.
Here’s what I do.
Conventional wisdom is to contribute about 15% of your income to retirement savings each year. That is a decent place to start, but I would like to be financially independent as soon as possible. I aim to contribute as close as I can to 50% of my income to my retirement and taxable investment accounts each year.
Yes, I’m serious – I really do this! You can read my AmeriCorps story and my tips for saving money to get better sense a sense of how/why.
Currently, the first $6,000 that I invest each year goes to my Roth IRA. Then I begin shoveling whatever else I can into my taxable (non-retirement) Vanguard account comprised of low-cost index funds for the rest of the year. If my employer-sponsored account options improve, I’ll likely shift much of my investing to those to benefit from the tax advantages.
Hans wrote more about the importance of investing for retirement here and about Roth vs. Traditional accounts here if you want to learn more.
Credit cards
I mentioned earlier that the high-yield savings account is one of my favorite money discoveries – another is the power of the credit card. When used responsibly, credit cards give you free money (cash back, travel rewards, etc.) with absolutely no downside!
I don’t typically like setting strict rules, but with credit cards, there are a few simple and very important rules to follow:
- I do not spend more money than I have.
- I wait for my monthly statement to be posted before paying off the statement balance. If you make a payment before the statement is posted, you typically will not receive reward points for your spending.
- I pay off the statement balance in full. Every month. I have never carried over a balance, which means that I have never paid a single cent of credit card interest. This is really important; credit cards often charge interest rates upwards of 15-20%!
While I have enjoyed the benefits of credit cards for several years now, it wasn’t until somewhat recently that I discovered what is often referred to as “travel hacking” or “churning” depending on your intentions. The key to success is the impressive sign-on bonuses that many credit cards offer. If you make sure to space out your applications according to the restrictions that various credit card companies have, you can basically just cycle through cards, earning sign-on bonus after sign-on bonus just for meeting the minimum spending threshold.
This will only be a worthwhile strategy if you have good credit, apply for cards that you are likely to be approved for, and pay attention to annual fees. ChooseFI has some excellent resources related to travel hacking if you are interested in learning more. Start here for an overview, and then take their FREE and very in-depth Travel Rewards 101 course. I’m not really doing this since I’m also looking to buy a house in the near future – so I don’t want to take any chances with my credit score – but it has certainly caught my eye.
So, how does my money management strategy compare to yours? Had you heard of high-yield savings accounts before this post? Are you going to start churning through credit cards so you can hack your expenses once we’re all traveling again?
P.S. If you want to learn more of the nitty-gritty details surrounding personal finance, check out Hans’ posts.
Note: Links with “*” at the end are affiliate links, meaning that we might receive a financial reward if you click the link and sign up for something. This is done at no extra cost to you, and I have only included products that I have used myself!
