One of my favorite things about this community that we’re building is how open people are to asking questions and considering different solutions for their money. It’s so refreshing to have honest conversations within a safe judgement-free space!

As I keep getting similar questions from different people, I’ve realized that if one person is asking, there are probably a lot of other people out there who would be interested in hearing the response. In an effort to keep the theme of sharing alive, I’ll be publishing these questions and responses in a semi-regular article.

Have a response for a reader that you’d like to add to the conversation? Add it in the comments below! Have a question of your own that you’d like to ask? Sent it to erica {at} theworthproject.co

 

“I’ve worked since I turned 16 and have saved a LOT of my own money. Now, I spend whenever, wherever. I’m going to Austin, TX in January, Iceland in February for a week, and NYC in March for a week because my bank account tells me I can. I have a lot of money in my checking because I never moved the money I didn’t spend the last seven years to savings accounts. Once I move out, rent will come into the picture, which will probably prohibit me from impulsively buying cheap flight tickets!

With this said, I’m looking for some advice on how to manage separate savings accounts. Do I go to different banks? Do I have five different accounts at the same bank? Are there different types of savings? Do I go to Charles Schwab and invest one of my accounts there? And with all of the new banks popping up that I’ve never heard of, how do I know I can trust one?

First, congratulations on saving so much money! And for being proactive about setting up a savings system before you start paying rent and shit gets real.

As I’ve mentioned, I’m a big advocate of having separate savings accounts set up for each goal. Not only does this keep you motivated (staring at your Thailand Vacation 2018 account will make other purchases seem insignificant), it does give you clear guidelines for what you can and can’t use that money for.

We use one bank for all of our savings accounts. That’s certainly a route that you can take, especially since most online banks make it really easy to set that up. We use Capital One 360, and have used them since graduating college (back when they were ING Direct – dating myself here). They allow you to have 25 savings accounts set up to keep all of your different goals organized.

For a savings account, your main options are going to be a traditional savings account or a money market account. They’re pretty much the same, though money market accounts are supposed to give you a higher interest rate (it doesn’t always work out that way).

When you’re looking at a bank there are a few things that are helpful to know:

  • Do they charge monthly maintenance fees? Some banks charge monthly maintenance fees. I personally hate paying fees so I avoid any bank that is going to charge me to keep my money with them.
  • Do they have minimums on their accounts? Some banks require a minimum balance to be kept in a savings account. Others won’t have a minimum but will charge you a monthly maintenance fee if the balance falls below a certain amount. Be sure to know these details. The bank we use doesn’t have a required minimum account balance.
  • What’s the interest rate? You’re not going to get rich by keeping your money in savings – inflation will be higher than what you’re earning as interest. But some traditional banks only offer 0.01% interest while others offer 1.4% (as of Feb 2018).
  • Are they FDIC insured? Pretty much every bank is, but if it’s a new to you bank that you’re unsure of, you can check to make sure that it is insured. This is the insurance the federal government provides for the money we have sitting in a bank, should that bank fail. The FDIC will cover you up to $250k. So if you have $100k sitting in a savings account at an FDIC insured bank, you’ll be covered should that bank go out of business. Note: only checking accounts, savings accounts, and CD’s are covered by FDIC insurance. If you have an investment account at the same bank, it won’t be covered.

When you have multiple bank accounts you can keep track of the accounts and all of the balances by keeping a spreadsheet of where your accounts are (and updating it manually) or you can create a free account with Personal Capital to view all of your accounts in one place, regardless of how many banks you end up using.

Once you’ve picked a bank, this guide will help you make organizing your money a breeze.

“Do you have any ideas for where to keep money that we don’t have a need for yet, but we don’t feel comfortable investing? Other than a traditional savings or investment account? We want to make more than 1% in a savings account but we don’t want it to be too risky in the stock market.”

I sure do! Figuring out where to put your money that you’ll want to use in the mid-term (that’s not part of your emergency fund or retirement) can be challenging. Jordan and I went through this mid-term planning for some money we’ll want to have access to in the next 2-7 years. I share our whole thought process and some options we considered (as well as what we ultimately chose) here.

“Hi Erica! What do you suggest for starting a retirement account?”

The first place to look, if you haven’t, is your employer. If your employer offers a plan (like a 401K) where they will match your contributions, that should be your first stop. Not every employer offers a 401k – or a retirement plan with matching though.

If you don’t have access to an employer-sponsored plan with matching (or if you’ve maxed out the match), the next place to look is an IRA. The two most popular options are a Roth IRA or Traditional IRA.

With a Roth IRA, you use after-tax income in the investment account, but when you retire you can use the money in the account, tax free.

With a Traditional IRA, it’s the opposite. You use pre-tax income in the investment account, but when you retire you have to pay taxes.

The 401k and the IRA are types of accounts. You’ll put investments inside of those accounts. For an easy rundown of what these accounts are and the investments to put inside of these accounts, check out this pocket guide to investing. It has you covered.

When shopping around for where to open your retirement account, you have a lot of options. My best piece of advice? Get really clear on the fees you’ll be charged. You work hard for your money – don’t be so eager to give it away to furnish some swanky mutual fund manager’s office.

1.5% might not sound like a lot, but that could be the difference between whether you get to spend your days sipping Mai Tai’s on the beach or stuck watching Jeopardy reruns at home. Choose wisely.

Need a rundown of what fees to look for? The pocket guide to investing has that for you as well. Seriously, you should probably read it.

There are so many options for investing – and more that pop up every day but I’ve included a few below to get your search started:

  1. Vanguard: they have a stellar reputation and some of the lowest fees in the industry.  Vanguard utilizes index funds (or EFT’s) so it’s a passive form of investing – meaning there’s no person managing the investments within the accounts, which is why the fee is so low. These passive funds have historically performed the best and they give you the lowest fees, so you keep more of your money. They have a lot of ‘target date’ options for retirement funds, which basically means you put in your target retirement date and they give you the best mix of investments within that account based on how long until you retire. It makes it pretty simple. (really confused about passive or active and what I just said? Read the investing pocket guide. I told you it would come in handy). I have my retirement account with Vanguard and I’ve been extremely happy with it. A big con of using them is they’re a bit more of a DIY approach. Their interface isn’t as user-friendly as some of the other options. You have to dig around for the calculators and things to help you know that you’re on the right path with how much you’re saving.
  2. Wealthfront, Betterment, or Ellevest: these are probably the most well known robo-advisors out there. They have easy calculators and graphics that show you how much you’re saving and whether it will be enough to fund your retirement. Both of these companies use index funds (or EFT’s), like what you buy directly from Vanguard. Their fee is going to be a little higher than if you were to go with Vanguard. They charge a 0.25% fee + the fee on the fund itself.

Retirement calculators:

It can be so tough to know that you’re saving enough for retirement. And let’s be honest, it’s not really all that fun to think about. But I have found that with the right mindset, using retirement calculators can be kind of…fun?

There are two calculators that I love. NerdWallet’s retirement calculator will give you a good jumping off point for deciding how much to save and to see if you’re on track. It’s not super comprehensive, but it’s a great place to start.

I’ve recently become a Personal Capital convert. I use their free tools to not only keep track of ALL of my different accounts (checking, savings, mortgage, investing, retirement), but I also love using their retirement calculator. It’s more in-depth and more personalized than what you’ll get from other calculators (because it pulls in all of your account balances). You then add in when you want to retire, how much you’ll contribute each year, and other big life events you might have, like buying a house or having a child. The calculator will give you an estimate of whether you’re on the right track to reach retirement when you want to. It also has a fee estimator, which will go through your accounts and give you an idea of what you’re paying in fees. This is so helpful – and much easier than going line by line through your accounts to make sure you’re not overpaying.

Hopefully that helps you to get started with setting up your retirement account!

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