Five??? What’s wrong with just one bank account??
Well, nothing, really. At this point, merely having one in the Philippines indicates financial stability. (Yes, sadly.) And we get it, setting aside enough cash to open and maintain one account is already quite a feat, especially if you’re barely making ends meet as it is.
But hear us out for a moment. If you can afford it, keeping your money in separate accounts can help you manage your finances better. Firstly, they’ll give you a clearer picture of how much you actually have. Secondly, these enable you to monitor your progress towards a specific financial goal. Lastly, separate accounts make it easier for you to stay on a budget.
How? Let’s illustrate by identifying and defining the five basic accounts each family should have:
- Family Checking Account.
- Family Savings Account.
- Emergency Fund Account.
- Retirement Fund Account.
- Miscellaneous Account.
Purpose: Monthly bills like utilities and rent, tuition fees, and other constant living expenses.
Allocation: Start by placing your entire paycheck into this account. After you’ve settled all the bills at the end of the month, use the remaining amount to set up the other bank accounts.
Tips: This account should always be adequately funded so that your checks don’t bounce. Otherwise, you risk incurring overdrafts or penalties.
Also, you may want to subscribe to your bank’s auto-debit or auto-pay function. This ensures that your bills are automatically paid on time, thus sparing you from penalties or inconvenient utility disconnection incidents.
Purpose: If the family checking account is for monthly bills, this account is for daily and weekly expenses. For instance, if you need to buy groceries or eat out for the evening, you can charge the bills to this account.
Allocation: Don’t put any more than 20% of your take-home pay here. Make sure your daily expenses don’t exceed that percentage either, of course.
Tips: Unlike the checking account, this account should come with an ATM card for easier access.
Purpose: Large, unforeseen expenses. Examples include house or car repair bills and hospitalization costs. Put simply, the emergency fund is the account that you wouldn’t want to access.
Allocation: About half a year’s expenses would be a good estimate.
Tips: Fill this one up before the next two on this list since you don’t want to be caught unprepared in the event of a crisis. Furthermore, it would be a good idea to set this up in a different bank so you won’t be tempted to touch it.
While you shouldn’t get an ATM for this account, do set it up as a regular savings account so you can access it easily when the need arises. Should you find yourself doing just that, be sure to replenish its funds immediately afterwards.
Purpose: Your retirement expenses, obviously.
Allocation: The amount would probably depend on your standard of living, but a good rule of thumb is eight times your current annual income.
Tips: Unlike the emergency account, growth takes precedence over easy access here. And so, feel free to explore other options apart from the regular savings accounts. For example, you can try putting the funds for this account in short or long-term time deposits or even on the stock market.
The bottomline is, this account should have grown enough to let you live off its dividends rather than the principal by the time you retire.
In addition, you shouldn’t touch this account until you actually retire. If you get retrenched, dip into the emergency fund momentarily instead.
Purpose: What’s life without a few little luxuries or rewards? Whether it’s a family vacation or a new car, this account covers those.
Allocation: This depends on your income and the expenses involved. Let’s say you’re saving up for a nice holiday abroad. Estimate its total costs, and then divide it by the number of weeks or months until your planned vacation date. This ought to give you an idea of how much you need to save each week or month.
Tips: This account is the last on this list for a reason. You should only strategize for this once you’ve created all the previous ones, and no sooner.
As with the retirement fund, you can make the most out of your miscellaneous funds by investing them in a short-term time deposit. This not only discourages you from inadvertently withdrawing money from it, but it also grows your money a bit.
As a final note, there is also better security in having multiple accounts. If you had just one account and your ATM got stolen or skimmed, you have a higher risk of losing a great deal of money in one go. In contrast, separate accounts would cushion such a blow considerably.
TLDR version: Don’t put all your eggs in one basket.