By Stephanie Yates
Because of all of the weddings and graduations, I always think of June as a time for new beginnings. Naturally, these thoughts of new beginnings lead me to thoughts about money and how our money management needs change over our lifetime. I think that the best money management system has enough simplicity to keep it from being burdensome, but enough complexity to meet our changing needs. Therefore, as we reach various milestones, the system that we use to manage our money should adapt accordingly. Based on this philosophy, I believe that everyone needs at least four bank accounts over the course of his or her lifetime, but possibly more.
The Post-Secondary Fund
I call the first essential bank account a “post-secondary fund.” Some folks call it a “college fund,” but I acknowledge that not all kids go (or should go) to college. Regardless, a post-secondary fund can help a child with whatever direction he or she chooses after high school. This is because of a concept called the “time value of money” that acknowledges that due to potential interest earnings, a dollar is worth more today than in the future. Keeping the time value of money in mind, starting that fund on the day a child is born (or soon after) and making contributions until they turn 18 will put time on your side in order to build a nice little high school graduation present. Arguably the best type of account for this purpose is a state-sponsored 529 savings plan—especially if you believe the child will opt to pursue higher education. These tax-advantaged accounts allow you to save for higher education but also transfer the funds to another family member if the child opts out of higher education or you can even withdraw the funds yourself after paying taxes and fees. Tax-advantaged accounts are either exempt from taxation, tax-deferred, or offer other types of tax benefits.
The Savings Account
As early as possible, kids need to learn the value of money. One way to introduce the subject is to talk about three basic things we can do with money: 1) spend it 2) save it and 3) share it. One way to reinforce these basics is to encourage kids to divide out their money in this manner any time they have some of their own. That’s where the savings account comes in. A savings account at a financial institution allows kids to learn about banking and makes it just a little more difficult to spend those funds that they earmarked for savings. Many financial institutions offer savings accounts for minors with no fees and no minimum balance requirement. Any time is a good time to open a savings account for a child, but certainly by middle school kids should be able to start.
The Checking Account
By the time a student finishes high school, he or she should have a checking account. This will allow him or her to make more withdrawals than are typically allowable with a savings account. This will be important once the student has more money to manage—for example, from a part-time job or college stipends. The student should learn how to reconcile this account monthly, avoid fees, and use any associated debit card responsibly.
The Retirement Account
With your first full-time job usually comes your first opportunity to save for retirement in an employer-sponsored, tax-advantaged account such as a 401(k) or 403(b). Often, young people enter the workforce and opt out of corporate retirement plans in order to have more money in their pockets. Again, the time value of money tells us we should start saving as much and as early as possible. Not only that, corporate retirement plans often include an employer match. That is, your employer matches your contributions based on a specific formula. However, if you don’t contribute, your employer doesn’t contribute on your behalf either. That’s what we call “leaving money on the table!” Where else can you automatically double your money? Therefore, before your income is committed to a number of expenses, it would be wise to make the maximum contribution that will be matched by your employer.
While those four are the essential accounts everyone should have, there are others that should be considered in certain situations. These include goal-specific savings accounts, individual retirement accounts, brokerage accounts, and joint checking accounts.
What accounts do you have? What accounts do you need? Take inventory!