This entry was posted on Thursday, March 6th, 2008 at 9:00 pm and is filed under Banking, Planning, Saving and Investing. You can leave a response, or trackback from your own site.
I have spent many years putting together and continually optimizing our financial operations. This article is here to help provide a model, should you find it worthy, as well as provide the background for a couple of future articles in which I will ask for your help in determining the next course of action.
ScrapperMom and I have a number of cash banking accounts:
- A Checking Account
- Savings and Money Market Accounts with EverBank, ING Direct, and a local bank in our town
- 5 Certificate of Deposit Accounts, currently with ING
Our cash accounts and flows look something like this:
All of our earnings get deposited into our Money Market, which pays a relatively high interest rate. Monthly or semi-monthly, money is automatically transferred from the MM account to our checking account to pay bills and fund retirement and savings accounts. I try to keep a zero sum budget, but any surplus just stays in the MM account. Any overruns get drawn from the MM account. Over time the MM account should stay at roughly the same balance. I try to keep at least approximately 1 months income in the MM account at all times.
Our checking account is really just a pass-through account, and is only required due to the federal restriction on the number of monthly withdrawals allowed from Money Market accounts (6 in total, no more than 3 of which can be by check). I make a few large transfers monthly to cover all of the obligations of the checking account. Most of our bills are paid automatically, except for bills with variable balances, such as utilities.
Retirement accounts are funded automatically through Vanguard. Vanguard automatically pulls the money from our checking account to fund both of our Roth IRA accounts. I funded half of our 2008 Roth IRAs in January in a lump sum payment, but then continued to fund the IRAs at 1/12 of the annual contribution limit per month. In other words, I took the $5000 limit for each account and divided by 12 to get $416.66 per month. Since paying this amount monthly would actually leave me $0.08 short of my allowable contribution in December, and since my brokerage only allows contributions of $100 or more, I simplified the monthly contribution to $400 each. In July, we will each have contributed the maximum allowable (-$100) to our IRAs for 2008, so I will make one time contributions of $100 each, and then start making contributions to an after tax brokerage account. This will be the subject of a future article.
I noticed that many bills that I get, especially for insurance premiums, have an annual premium, but allow me to pay monthly. However, these monthly payments are actually more expensive than the annual payment. It can sometimes cost as much as $60 more per year to make monthly payments rather than 1 annual payment. So a couple of years ago I started making double payments on one of my monthly insurance premiums: 1 to the insurance company and 1 to my savings account. When that bill was paid, I had all of next year’s bill ready to go. Then I started making extra payments to the next bill, etc. Now when I get a renewal notice, I pay the bill all in one shot. This allows me to keep making monthly payments, collect interest on those payments, but minimize the overall cost of the payments. We also save 1/12 of our Christmas budget each month so that we don’t have to go into debt in December.
Lastly, we have a CD ladder that houses our emergency fund. Right now, each CD is a 5 year CD and contains 1/5 of our emergency fund. The CDs are staggered so that one is due to mature each year. Some people like to keep their emergency funds in shorter term CDs, but I don’t see what difference it makes. I will have to pay a few months interest if I withdraw from a CD before maturity, but that will be a small price to pay in a true emergency. Since our emergency fund is still not as large as I would like, or as conventional advice would suggest (3-6 months of living expenses), we contribute to our ING account on a monthly basis. Each year when a CD comes due, we take the contributions we have been making to the ING account and dump them into the CD renewal for another 5 years. In this way, we will slowly build up the cash reserve that will keep us out of serious trouble should catastrophe ever strike.
Does your cash account system look similar to ours? How does it differ? Is this too complicated or am we missing something essential? Do you have an emergency fund? Where do you keep it? How much, relative to your income, do you keep in it?