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Five Accounts You Absolutely Must Have (And Four You Don’t)

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There are five finance related accounts in the personal finance world that I think every single person must have and they should get it as soon as possible. They run the gamut of the obvious, an accessible checking account, to the not so obvious, a high yield savings account (as surprising as it sounds, this is not obvious to most people because they are amazed when I tell them you can get 5% from a regular savings account). So, please enjoy this list of five accounts you absolutely must have and three that you absolutely must avoid.

These Five Accounts You Absolutely Must Have

1. High Yield Online Savings Account

Number one definite must have account is a high yield savings account getting you at least 4%, at the very very least. If you assume inflation at around 3%, anything less and you’re losing money. Take your pick of ING Direct, FNBO Direct, Emigrant Direct, Citi, and you’ll get over 4%. My recommendation is that if you have a Citi or an HSBC bank account, go with one of them because your transfers will be instant between accounts. If you don’t, I use FNBO Direct but both they and HSBC offer 5.05% APY.

2. Savings and/or Checking Account at a Credit Union

A relationship with a credit union is an absolute must for anyone looking to ever get a loan for anything. The typical rate for a 5 year loan on a new car from Tower Federal Credit Union (some local credit union in my area but I do not have an account there) is 5.74% (currently they have a promotion where the rate is only 5.34%) and for a used car it’s 6.19%. Compare that with a Bank of America rate of 5.89% for new and 6.54% for used. While the difference isn’t all that great, for the typical rates, why pay more than you have to? Also, the interest rates on your savings and checking accounts will typically be higher as well.

Why are the rates low on loans and higher on savings accounts? It’s because the basic premise of a credit union is that it’s there to pool the collective resources of its members and work for its members. It’s a not-for-profit so it’s not looking to earn money off you, at least as its primary focus, and so that’s why the rates are always so much more favorable than a regular bank. Whereas a bank is FDIC insured, credit unions are covered by the National Credit Union Share Insurance Fund (NCUSI) administered by the National Credit Union Administration, so you’ll see NCUA-insured on the placards (also up to $100k).

3. Retirement Account (Roth IRA, 401k or equivalent)

If you have a job and your employer offers a 401k, with or without a match, you should be participating in your 401k (or an equivalent depending on your employer). If you can, budget-wise and income-restriction-wise, definitely participate in the Roth IRA as well. Just as how squirrels save away nuts for the winter, you should be doing the same through a tax-advantaged retirement account. The 401k will let you save pre-tax money but it will be taxed when you take payments in retirement. A Roth IRA will let you save money post-tax but it won’t be taxed when you take payments in retirement. It’s important to use both so that your retirement assets are tax diversified.

4. Accessible Checking Account (Ubiquitous ATMs)

I think that most checking accounts are pretty much the same and it really doesn’t matter which bank you go to, with several exceptions and the biggest one is the location of its branches and ATMs. I chose to do my main banking with Bank of America because they have a branch near my home and my work place plus they have ATMs everywhere. In fact, BoA has 16,000 ATMs and 5,700 branches, so that I can probably find one anywhere I go and I can avoid those stupid ATM fees everyone hates.

5. Credit Card Account

If for nothing else other than to have a safety blanket, having a credit card builds credit and will pay dividends down the road. You can leave it out of your wallet or purse and it’s still building you some solid credit because it’s lengthening your credit history. Don’t ever carry a balance either.

These Four Accounts You Absolutely Must Avoid

1. Store Branded Credit Card Accounts

We’re talking department store credit cards, the ones where they offer you 10% off today’s purchase if you’re approved, and you should avoid these because the APR on these babies are usually pretty high and the payoff, the 10% off, is usually not worth it. If you want free cash for credit cards, here’s a list of credit cards with sign-up promotional offers that you can take to the bank and spend the rest at the store.

2. Finance Accounts From a Dealer, Store, or Anywhere That Isn’t A Reputable Bank

Buying a car? Buying a TV? Avoid the financing from the auto dealer or the electronics store unless it’s a 0% APY for a year, or something great like that. Also be aware that if you do get that offer, it’s likely that once it ends, all of the interest that was deferred during that period will come due (read about how 0% financing offers work). It’s a very insidious practice but one that’s well documented but not well explained to borrowers. If you need a loan, try to get it from your bank or credit union either before you buy or immediately afterwards. If you can get some sort of discount or promotional offer for using their financing, you can always use their financing and then secure your own afterwards.

3. More Than One Checking or Savings Account

This one isn’t that big of a deal but you really should consolidate your banking for a few reasons. First, it’s always better to simplify your life and deal with as few things as necessary. There’s no sense trying figure out which account has what because you’ll start to go crazy. Secondly, you want to consolidate balances so that they’re higher and you can avoid any low balance fees if your bank has them. Lastly, the fewer accounts you have the fewer opportunities there are for your information to be compromised, either by the bank or by you on accident. Simplification is crucial.

4. Reward-less Credit Card Accounts

Your credit card is charging each merchant you deal with somewhere in the neighborhood of 2-3% for each transaction, there’s no reason why you shouldn’t get kicked back a little piece of that. It takes about thirty seconds to apply for a card that will give you 1% cashback on all of your purchases, which is an automatic 1% discount on everything you buy. I use a variety of cards but I like my Citi mtvU card for 5% cashback at restaurants, movies, and bookstores; a Discover Open Road card for 5% cashback on gas purchases; and an American Express Costco TrueEarnings card for 1% cashback everything else with no annual limit.

{ 28 comments, please add your thoughts now! }

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28 Responses to “Five Accounts You Absolutely Must Have (And Four You Don’t)”

  1. Josh says:

    That’s a great article. The most important accounts to have!!!

  2. kitty says:

    Pretty good article. Did you forget FNBO Direct (6% promotional rate till almost the end of September – don’t remember the date, 5.25% for current holders)?

    I have a question about store credit cards. You say that APR on them is big, but if you always pay your bill in full, why do you care about APR at all? I’ve never bothered to check APR on credit cards not in 20 years or so I’ve been using them since I’ve never had any intention of paying it. The only exception are 0% offers, but anything that is higher than what you can get on a CD after taxes is too high as far as I am concerned, mortgage is the only exception. Also, what harm would it be in getting a store credit card, getting 10% and then cutting the card up and not using it? I admit I find it hard to resist 10% on the stuff I have already selected and am about to buy, but then I don’t even bother activating the card. Is there anything I am missing?

    • jim says:

      I didn’t list FNBO Direct only because they’re relatively new and I just forgot about them.

      If you pay your bill in full, then the APR wouldn’t matter but there is a negative impact on your credit score when you open up a lot of these types of cards, or any credit lines. The more inquiries you have, the lower your score will be, because it represents a risk to the lender. If you are asking for credit, why do you need it? If you are asking often, why?

      I would take the promotional offers first, then get the 10%… unless you’re spending $1000s.

  3. I have a couple of online savings accounts that I should probably close (well, close until I only have one) but all of my savings are now at my new brick and mortar savings account which offers 5.25% (Norway Savings Bank) – the online interface is “okay” but not great, but I don’t have to wait 3-4 business days to transfer money from savings to checking or back and have a better interest rate at least until the end of the year.

  4. Jason says:

    I don’t necessarily agree with your statement that you do not need more than one checking account. If you are going to get involved with online sales through PayPal (or a competing service) you do eventually need to link to a bank account. I feel that it is very important to have a wall of seperation between your regular account and an account linked to an online service such as PayPal. While PayPal hasn’t had the spectacular hacker break-ins that other companies have had, I see real danger in linking your PayPal account to your everyday account. Further, by using a seperate account you can more easily track your profit/loss since it will not be effected by your daily activities.

    • jim says:

      What I do is I actually use a separate ING Direct account, because they’re the easiest to create, to act as my bank account firewall. I keep that account as close to empty as possible to prevent this sort of thing.

      In that particular case, that’s an account you have a reason to have. I just mean having legacy accounts that you don’t really use and just have around because you didn’t know whether you wanted to close them or not.

  5. Cory says:

    I’ll be starting work full-time this fall (just finishing my B.S. now) and I can’t decide whether to have direct deposite in my HSBC checking account or use a local credit union!

    I rarely need cash … and a transfer from the credit union to my HSBC savings account takes 3-4 days, vs an immediate transfer from HSBC checking …

    I hate making decisions.

  6. cami says:

    Personally, I like to have more than one savings account. I have a high yield online savings account that holds some of my emergency fund money and then I have an additional savings account where I save up money during the year for things like school fees, books, travel, etc. The rate isn’t quite as good as the high yield account, but it’s better than most brick-and-mortars. Having the emergency fund in a separate fund helps me to forget it’s there (which is a good thing), and I don’t have to keep track of what can be spent and what can’t. I also have a third savings account at a credit union from back home, and this is good for transferring money around the family. While I understand why you think it’s great to have just one account, sometimes it’s less of a hassle to have a few.

  7. Dennis says:

    nice lists.

    Like cami, I am looking to add another savings account to manage my money. Mainly because emigrant direct has been a big pain!

  8. broknowrchlatr says:

    I agree with you for the most part. Where I differ is in store credit cards. I agree that most are bad, but home store cards can be very beneficial. I have 2. Home Depot and Lowes. Both of them constantly switch between 6 months and 12 months no interest, no payments on purchases $299 and up. It so happens that almost every home imporvement I do costs more than $299. At any time, you can wait up to a week and the 12 month deal is open at one of the 2 stores. Done this about 10 times now and still have several items on credit right now.

    When I buy something, I put the money in my Emmigrant Direct account and put the charge on the card. But, I put the money in to the Emmigrant direct account at a 5% discount and get it in an emmigrant CD for 12 months. That way, it comes up to the value of the purchase in 12 months.

    So, as opposed to taking a 1 time 10% discount with most store cards, I am taking a 5% discount off all purchases.

  9. Nigel says:

    Why is the high-yield saving account considered to be a must have? Many money market mutual funds seem to have about the same yields, if I am not mistaken. If you already have a brokerage account, why not hold some of your money in a money market fund, instead of opening a separate account?

    Fidelity currently has 4.95% yield on FGRXX (Fidelity US Govt Reserves fund). It provides check-writing privileges, free electronic transfers from/to other accounts just like any savings account. True, you can get slightly higher interest at ING direct etc, but it doesn’t seem to me to be worth the hassle. Am I missing something?

  10. Josh says:

    I have yet to see a money market yield 5.25 percent. Please link me to one that does.

    • jim says:

      Well the Vanguard ones do pretty well, the Prime Money Mkt Fund (VMMXX) 1 Year return is 5.22% which is spitting distance.

  11. Josh says:

    That’s fine if you go the way of funds. I prefer high yield savings accounts so that I can take my money and run whenever I want to.

  12. Nigel says:

    According to bankrate.com, Vanguard Prime Money Market Fund (VMMXX) currently yields 5.25%.

  13. broknowrchlatr says:

    If you are using High Yield Savings accounts for Emergency savings, rolling maturity CDs can get you returns that beat 5.25%

    I just got involved with Zions Direct. They do auctions for rates every week. Their 1 year CDs are yielding over 5.5% now and the minimum is $1000. Evern 6 month ones are 5.489%. So, if you have a 6 month emergency fund you could get 6 of them continuously rolling over.

  14. frugal mama says:

    Credit unions win hands down over online banks in my opinion. My current money market rate is almost 5.5% with a measly $500 balance requirement. It may not be the absolute highest rate out there, but I am willing to compromise for the sake of having a brick and mortar building. My credit union refunds a certain amount per month in ATM fees, has free online bill paying, low cost loans, Roths, and all sorts of investing options. Not only that, each December, we get a “dividend” based on our balances.

    To folks who think they may not qualify for credit unions: Please check the membership reuirements. Credit unions are really on the upswing in my corner of the world. There are credit unions for people who granduated from certain universities, and credit unions attached to some major industries.. and these industry-related credit unions are often available if you work at the company, live in the same town as the company or worship in the same town as the company.

    ~fm

  15. Art Dinkin says:

    Good reference post, but I too disagree about more than one checking account. We have two. Both are joint accounts but one is primarily mine and the other is primarily my wife’s. Both are from the same bank so we can easily online transfer money between them as needed.

    We came up with this system early in our marriage after dealing with “who gets the checkbook today” discussions. It also gives our own debit cards (our primary method of spending) so we do not have to worry about spending the same money twice!

  16. one reason why you may want to have more than one checking or savings account is that you may want to keep your balances below the fdic insurance coverage (in the unlikely event of a bank failure). i know it’s a stretch, but i’m feeling argumentative today. :)

    • jim says:

      Actually, that’s an excellent reason to have multiple accounts, thanks for bringing it up. I didn’t think about it because I don’t have $100k cash in my savings account… yet. :)

  17. FinancialPhoenix says:

    I have two checking accounts because when I moved from CA to TX I found out that the bozos at Bank of America don’t have their banks on one system. This meant that in order to deposit money into my CA account I actually had to go into the branch and do it in person. Since so many accounts were tied to my CA account, I couldn’t just cancel and switch it all to TX. It’s still my primary account for things (direct deposit, auto bill payment, etc) but when I need to deposit, it goes into the TX account.

    It’s also nice because I can siphon away money for things and NOTO TOUCH IT, like property taxes, or vacations.

  18. Khyron says:

    Store credit cards – get them and don’t use them. Credit diversity.

    Multiple checking accounts – to each their own, unless you do the online business thing in which case you should have > 1.

    Rolling CDs in a rising interest rate environment. Maybe. If interest rates rise when you expect them to. My ladder has been stagnant for 1.5 years. *shrug*

    What about GMAC bank?

    Also, as for having multiple accounts less than the FDIC insurance limit, that is basically what the rich people do. I can’t think of the name of the specific vehicle at the moment, but basically, the company/organization will accept deposits and then divide the funds into accounts with multiple FDIC insured banks to stay under the insurance limit. There are several of these funds/groups/companies in existence; I just remember reading about one in particular once.

    Be aware that the limit increased recently too. (Within the last 1.5 years, but I can’t remember what the new limit is.) Gotta love legislation.

    That is all.

  19. kitty says:

    “there is a negative impact on your credit score when you open up a lot of these types of cards, or any credit lines. ”
    I am confused here. I thought a big chunk of your credit score is the ratio of debt to available credit, so if I have cards that I don’t use wouldn’t the score be higher – more available credit, no increase in debt?
    I just read on another blog how somebody’s score went down after he paid off his mortgage (for some reason I failed to understand since I thought it counts as debt not as available credit) and one solution mentioned was to get another credit card. I paid off my mortgage too, so I was confused about it too – if I should have more or less credit cards now that I have no mortgage. Now, I don’t really need loans so I am not overly concerned with the credit score, but I am still interested.

    I used to have one saving, but as I started taking advantage of promotional offers, I got > 1: opened HSBC Direct to get promotional rate, opened FNBO Direct; recently Citibank to get free $100. Probably shouldn’t be chasing it, but I like free money.

    One advantage of multiple accounts checking or savings that are accessible via a debit card is if you travel. You need access to cash when you travel for places that don’t take credit cards, but you don’t want a debit card to an account that has a lot of money to be lost or stolen. Having another account that only has only just enough to pay for the trip’s expenses and no credit line helps.

  20. Jay Wilson says:

    I like having two checking accounts: one for paying bills and another for play. Helps me to keep the monies separate and be extra responsible with both when it comes to spending.

  21. KMull says:

    Agree with pretty much everything you said. I have used a store card in the past to save on a $300 purchase, and then never use it again. Should probably cancel it…

  22. Telemill says:

    Wow, you make me feel very good about myself and my personal finance habits. I’ve followed your advice (without knowing it) very closely in my financial life recently.

    However, I must agree with Jason on July 10th that when you life becomes more complicated because you are doing more “things” then your finances and the vessels you use to hold your money becomes a little more complicated as well. Those you may find yourself some several bank accounts.

    In my case: We have a joint account (credit union – for the household) and two personal accounts (fun money-allowance for each of us), we have several savings accounts that are “earmarked” for special stuff like . . . downpayment on the house, emergency fund, vacation fund, etc. I also own a small home business and have a separate account for that and a separate savings account as well. Yeah, we have 4 savings accounts and 4 checking accounts. It can get a little complicated but we make sure that these are fee-less accounts so it’s not charging us extra for anything.

    But you can see how a complicated life and complicate the theory of “one checking account”

    Also, may I add (since my goal is to eventually have millions) when you begin to have accounts in the 6 digits, for safety sake you will have to have more than one account FDIC insures up to $100,000 per account. The Credit Union’s insurance only insures up to $250,000-300,000 (I’m not sure but it’s around this amount).

  23. Chris Carpinello says:

    I generally agree about store branded credit cards. One notable exception for me is Macy’s (www.macys.com). They routinely have sales in their brick and mortar stores that offer an additional 10-20% off if you use their credit card to pay for the purchase. I do most of my clothes shopping with Macy’s because they routinely have what I want. When you consider the cost of clothing (especially business attire), the savings gained by using their store card over a general credit card is astounding. Obviously the only way this works in my favor is by not carrying a balance from month to month.

  24. AndyM says:

    Great article — one more reason why maintaining as few accounts as possible is important: we suffer from a built-in psychological error called mental accounting. We focus on the account where good things are happening (high returns) and forget about the account(s) where it’s not so good (low returns). Few people take the time to pull all their statements together to get a comprehensive view of their finances — but it’s your total assets/liabilities that count.


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