You Don’t Need a Savings Account: How to Set Up Your Cash Flow
Y’all, I’m running out of stock photo options for screens with vaguely financial screen fills. Send help.
I will be the first to admit that this title is a little clickbait-y – but when you compete with headlines like, “THE COVID SYMPTOM NOBODY’S TALKING ABOUT,” sometimes we have to take #measures. Desperate times, people.
Anyway, while I’m not actually suggesting you “delete” your savings account from your financial life, one of the underpinnings of this post (which will pertain more to setting up your cash flow optimally) is that your savings account is a vestige of another time.
The savings account is the appendix of the financial world. And while it’s far less likely to erupt and create searing stomach pain, it’s also probably not doing you any favors. Let’s dive in.
The origins of the saving account
I didn’t know this until recently, but apparently savings accounts used to get crazy-good interest rates: I’m talking 5%. According to this Bankrate article, a 6-mo. CD (certificate of deposit) in the mid-1980s would’ve earned you almost 12%. Bananas! The interest rates that banks will give you are closely correlated to Federal Reserve interest rates, and both are very low right now.
While they’ve only been tracking savings account interest rates since 2010, the CD example is strong proof that traditional “savings” vehicles used to make a lot more sense.
Because things are so bleak right now in Savings Account Interest Land, it always makes me a little sad when people DM me and ask what my favorite high-yield savings account is, because my answer is none of them. I don’t mess with high-yield savings accounts, because I only keep cash on hand to cover a couple months of expenses. The rest is invested and growing in earnest.
Whether you’re getting a 0.4% or 0.6% interest rate isn’t really going to make a difference in the long run, and if you DO have enough money in a savings account for 0.6% simple interest to be meaningful, there are larger problems in your financial strategy: A 0.6% savings account with $100,000 in it would generate $600 per year. It’s more likely that you probably have around $10,000 sitting in savings (for cash on hand), which would generate $60/year, or $5/month. I wouldn’t spend too much time thinking about this decision.
I’m not saying $600 per year is negligible, but in order to generate substantial returns in a HYSA, you have to put way too much money in it.
In short, we’re still operating in a financial system that’s “asking $3 questions, not $30,000 questions,” to quote Ramit Sethi (we’ll circle back to “cash on hand” and “emergency savings” at the end of this article).
Let’s zoom out and talk about your personal finance ecosystem more broadly
There are a few key takeaways I want to establish before we start talking account breakdowns, because I think these are principles I take for granted (I know I take them for granted because I have a conversation about once per week where I’m reminded that solid money philosophy has to form the foundation of a solid strategy).
You want to be paying this month’s bills with last month’s money.
Put another way: If you’re waiting for this month’s paycheck to pay this month’s bills, you’ve got a cash flow problem. I’m a big fan of credit card autopay, and I suggest it often. The most frequent rebuttal I hear is some variation of, “But what if there’s not enough money in the checking account to cover it?” If you’re cash-flowing like the true king or queen that you are, this should never be a concern – being afraid that there won’t be enough in checking to cover your credit card bill means you’re spending too much or earning too little (and you can do one or the other from time to time, but you can’t do both!).
Your checking account is the landing pad and launchpad for your money.
It sounds obvious, but it bears stating explicitly: The checking account is, for all intents and purposes, the first place your money will go, and the place from which it’ll be sent to other accounts. Unless you want to deal in cash for everything and barter with merchants for expensive furs and land deeds like a deranged Oregon Trail enthusiast, having a checking account that offers easy access and no fees is huge. While it’s still a big bank and not exactly a “no fees across the board” offering, I like Chase for their ubiquity. There are Chase banks no matter where you go (maybe Elon will even charter one on Mars!) and they have the money and manpower to make their digital experiences really good, which I think matters a lot as a digital native. Moreover, Chase’s credit card offering is the strongest for travel rewards (my breakdown is here), and having an established banking history with Chase will (a) help with your credit card approval odds and (b) allow all your banking and most of your credit cards to be in one portal.
How does one start?
Because we just established that the checking account is home base, let’s start there.
If you feel like you have no idea what’s going on in your financial world, the checking account is the best place to take your initial inventory. I recommend opening up your banking app or website and pulling up your checking account, then recording the “events” over the course of a month. You should look for a few things in particular:
When do your paychecks hit? Get specific. Which days of the month can you typically expect income? How much?
When do you have to pay your rent or mortgage? Most of the time, rent is due on the first of the month. If you pay your rent with a credit card, I’d plead that you start using your checking account instead – most of the time, paying rent with a credit card has high fees associated ($50+ per transaction), which means if you think your rent is $1,050 but you pay it with a credit card, it’s more like $1,100. No bueno. Your mortgage payment likely comes directly out of checking, if you have one.
When are your credit card bills due? I have five credit cards, and they all come due on different days of the month. While I have all my cards set up on autopay now, I used to go in manually on the 3rd, the 5th, the 18th, the 21st, and the 25th to pay these credit card bills. I was bound to forget, so I turned on autopay. It’s good to know when your credit card bills are due for the purposes of this inventory. If you don’t like the fact that they’re scattered on different days (some people are even more type A than I am and like every credit card bill to be paid on the last day of the month for their budgeting purposes), you can actually request a different due date in your credit card portal. Keep in mind that it shouldn’t matter when the bills are being paid as long as your cash flow is set up properly; if you’re moving them around to strategically follow pay-days, that’s a sign you’re overspending.
Quick note: For budgeting purposes, I budget for my purchases the day the transaction happens, not the day I pay the credit card bill. For example, if I buy something on December 5, it counts toward December’s budget – even if the transaction is on a credit card that won’t be paid until February 5. I think this type of accounting can throw people off if they’re overspending, because they’re living too close to the edge – if you’re looking at the amount of money coming in for the month of December to determine how much you should spend in December, you’re going to get into hot water – your December expenses won’t actually come home to roost until February when your credit card bill is due, so it’s helpful (and beneficial!) to know what your overall monthly expenses are and verify that they’re well within your income limits so it doesn’t matter when you pay the bills.
Do you have any auto-transfers already set up to saving or investment accounts? If you’re a long-time reader of Money with Katie, you probably have auto-transfers already scheduled for your Safety Net, Roth IRA, and General Investing accounts. It’s good to note when these happen for the sake of this exercise.
What other payments come directly out of checking? For me, my car payment comes directly from checking every month on the same day. Other than that, I don’t have any direct-to-checking charges. I funnel everything through credit cards for both (a) security/fraud prevention reasons and (b) to earn points or cash on everything I buy. Awhile ago, my identity was stolen because someone got hold of my debit card number. You can read about that nightmare and laugh at my expense here.
One thing you may notice when you do this is that you have a lot of charges in your checking account for every day purchases. My philosophy is (as alluded to in #5) to put everything that I can on credit cards, unless there’s an additional fee to do so (like the rent example).
It makes me sad that Dave Ramsey has horrified our entire generation into avoiding credit cards, but credit cards are very powerful tools and unless you’re confident that you’ll screw up your entire life by getting your hands on one, you’re leaving money on the table (in the form of free travel, cash back, etc.) by paying for everything out of your checking account directly on a debit card.
Fun fact: Since my identity was stolen by a mischievous fraud ring in Houston due to using a debit card, I’ve since opted not to even carry one. That’s right: I don’t even have a debit card (well, I do; it sits in a safe location and is used only for transactions at the bank in-person). I wouldn’t swipe that thing in a public place if you paid me to do so.
The layers of your financial life
Layer #1: Your checking account, the place through which all your money flows
I would recommend having cash on hand in this account to cover two months of expenses at any given time, that way you’re sincerely unworried about whether or not your Chase Sapphire autopay will overdraft it.
Layer #2 Outgoing: Your credit cards, which you use to pay for all your daily expenses
This means that all your spending (except for your rent, car payment, or other loan payments that have to come directly from checking) will be consolidated in “one” place – your credit cards. This will naturally begin to extend the time between the moment your paycheck hits your account and the moment you actually pay for your purchases, because your credit card statement for a particular month will close, and then the bill will come due a few weeks later.
Layer #2 Saving & Investing: Your investment accounts, where you’ll shovel as much as humanly possible
Right? :) The natural other side of the coin when we talk about your cash flow is what you do with the money “left over” every month (I put “left over” in quotes because in a perfect world, you’d make the saving and investing decisions first, then make the decisions about how to spend – but I’m not stupid, and I know y’all have to eat).
Ideally, you’ll get to the point where your income is rapidly outpacing your spending. When I first began working and had no side hustles to speak of like the unenlightened harlot I was, I was taking home about $3,100 per month after taxes and my 401(k) contribution of 10%. I was probably spending about $2,900 per month, which meant I was “saving” $200 per month – and I use saving loosely and within generous quotation marks, because the leftover money would just sit there in checking unaccounted for until eventually enough overflow built up and I’d transfer it to sit in savings and continue to do nothing. Not a good plan.
Fast-forward to now, where I’ve managed to trim my spending to about $2,600 per month, and my income varies anywhere from $5,000 to $10,000 per month, depending on the amount of extra work I pick up. All that extra money has to go somewhere, right? And ideally, we want it to go somewhere that’s going to generate more money on its own.
Investing isn’t saving – investing is spending money on assets. You’re buying assets that will appreciate in value on your behalf without you having to do ANYTHING.
The saving and investing layer of the equation, in more detail
While this post isn’t necessarily about how to set up your budget or which investment accounts to open (I’ll link some below that dive deeper there), the important layer you’ll probably notice is missing is the savings account. What happened to the savings account?
When your financial life becomes a well-oiled machine (or a well-charged Tesla, since we’ve already made one Elon reference in this post), you’ll find that you no longer have any use for the savings account.
Think about it: What’s the point? It’s practically a checking account with half an inch more friction to access, but it takes all of 30 seconds to transfer money between them. Without a meaningful interest rate, the typical savings account is totally useless.
The common question at this point that you may find yourself asking is, Where do I put my long-term savings, then?
And my friends, do I have a solution for YOU! Ever since I’ve found this account, I’ve never looked back: The Betterment Safety Net.
To me, it’s f***ing genius, and here’s why:
The Betterment Safety Net account is actually an investment account (Betterment is a robo-adviser brokerage firm and I DM them on Instagram approx. 3x/week to tell them they should sponsor me, but so far, no response – nevertheless, she persisted). *Update from the time of writing: They finally responded. I’m in!
Rather than being a “normal” investment account for a young person (which would hold somewhere around 90% stocks, 10% bonds to generate growth), the Safety Net is 85% bonds, 15% stocks – which means it’s relatively very safe, but has enough growth (from the stocks) to generate returns.
I invested $11,000 (my entire “emergency fund”) in Safety Net in April, and now it’s worth $12,00. How’s that make you feel about a 0.4% annual return in a high-yield savings account?
Of course, because the money is invested, I’d have to sell off my positions if I needed it – which means I’d have to pay capital gains tax during tax season on the growth of the index funds that I sell. But here’s why I’m not worried:
When you’ve got your financial shit together, you realize very few things ever constitute “emergencies.”
A random $300 new tire? No big deal. An $800 vet bill? I’ve got buffer for that. This is why I have a couple months of cash ready to rock in checking. If you’re living well beneath your means, you’ll always have breathing room in your checking account, because theoretically you always have far more coming in than what’s going out.
Those types of expenses would panic the average American who, according to the Federal Reserve in 2019, couldn’t afford an unexpected $400 expense. But not you – because you’re not average, and you’ve been reading a money blog for the last 10 minutes. Please, use this moment to pat yourself on the back.
Short of a total loss of all employment, there’s very little that would create a true emergency situation for a person that follows the above steps – and that feeling of freedom (the “I don’t have to worry about an unexpected bill or a pay cut because I’ve created so much margin in my life”) is worth more than every single bottomless mimosa brunch you’ve ever attended, combined.
And do I still have a savings account? Yes, I do – but it’s just the holding space for overflow money. Because I work hard to be under-budget and generate extra, unaccounted-for income whenever possible, often times my checking account will grow beyond 2-3 months of expenses over time, and I’ll shuffle it into savings before I send it as an extra deposit to my General Investing account. This is merely to say: The savings account should be an extra holding bucket, not a part of your strategy.
Other reading alluded to in this post that may interest you
How to Start Building Your Emergency Fund [more on the Betterment Safety Net account and tactical advice]
What I Use to Invest [Betterment review]
