So many of us deal with an unnecessary level of complexity when it comes to cash management and investing—particularly the number of accounts we must keep track of. We collect former employer plans as we change jobs. A spouse’s or partner’s accounts may need to be included at some point. Children, other dependents, or estate planning may necessitate the creation of even more accounts. What we don’t do often enough, though, is sit down, take stock of everything, and simplify where possible—just for sanity’s sake! Here are some tips and a general framework to apply. Hopefully, you find something here you can implement in your own life to make things easier for yourself.
A Framework for Managing Your Financial Accounts
Individual Finances
Joint Finances
The framework above is based on the principle of one account, one purpose:
- One checking account for paying bills.
- One Cash Alternatives or savings account for earning as much low-risk interest as possible on the additional cash you hold.
- One brokerage account for pursuing modestly higher returns by taking on a bit more risk to fund pre-retirement goals or for investing excess taxable savings in retirement.
- And finally, retirement accounts where we place most of our savings, hopefully in a tax-advantaged way. Here you sometimes can’t avoid holding multiple accounts, but usually three at most per individual will suffice (your current employer plan, a Roth IRA for after-tax saving, and, if appropriate, a Traditional IRA for pre-tax saving or to hold retirement assets rolled over from former employer plans).
Few of us need multiple bank accounts of the same type nowadays. Even if your savings are over FDIC limits, there are several institutions now that can automatically place your cash with a group of program banks to keep your savings insured. Note, for brevity I’ve excluded from the discussion other account types (Health Savings Accounts, 529 accounts, trust accounts, pensions, etc.) that are not as universal.
Another Cash Management Option: Vanguard’s New Cash Plus Account
One twist on this setup that I’ve employed recently in the management of my own finances is to utilize Vanguard’s new Cash Plus account to get more of my household’s cash earning a high interest rate. I have no affiliation with Vanguard, but in this companion article I walk through how I’m using this new offering.
What to Do About Former Employer Retirement Accounts
In my opinion, it’s usually best to roll over retirement accounts from previous employers—if not to lower fees or expand your investment options, at least to simplify the management of your savings. The receiving vehicle can either be an Individual Retirement Account you manage yourself or your advisor manages, which usually has a greater number of (often cheaper) investment options, or your current employer’s plan (if permitted). But this is a complicated subject. When assessing this for clients, I produce a separate detailed assessment of the pros and cons so they can make the informed decision that’s right for them.
Cash Management for Couples: The Question of Joint Finances
After a marriage or decision to cohabitate, the sudden combining of finances can be daunting. The best thing to do is talk about it early. How will you manage money after the union? For married couples, the use of joint accounts as illustrated above is the simplest and easiest. Studies suggest couples that manage their finances jointly have greater relationship satisfaction. It may boost transparency and trust, which seems reasonable. I don’t know how powerful this effect really is; everyone is different. But I am confident that the more accounts you have, the more stressful and complicated your life is, which can’t be good!
Reasons for Holding Additional Accounts
Now there are reasons to hold additional accounts of the same type. I mention a few below (not an exhaustive list):
- Unmarried couples and some married couples prefer to continue to manage their finances separately and it really works for them. Fair! The free app Honeydue helps couples budget and manage separate finances while still providing transparency with the other partner.
- It’s rare, but you may like the investment options in a former employer plan and don’t want to be forced to change your allocation by rolling it “in” or “over”.
- Sometimes certain premarital assets should remain segregated.
- You may hold a separate account targeting a specific goal for “money bucketing” reasons (90% of money management is psychology after all!). I support this as long as the cost (in terms of mental energy) doesn’t exceed the benefit.
The Path to Simpler Cash Management (and Possibly Greater Interest Income)
For those of you who have gone through my planning process, you’ve already inventoried your financial life. The next logical step is to rethink how you’re managing your money, especially your cash in the bank, and make changes you think could simplify your life and/or boost the interest income you’re earning.
The main cash management takeaways are (1) you probably don’t need multiple checking accounts and multiple savings accounts and (2) you may want to take the time to roll over old employer plans. This way, you’re managing as much of your money in one place as possible.
As a side note, make sure you don’t have excess savings just sitting around in checking accounts earning nothing. The lowest hanging fruit is to get as much of your cash as is prudent into a high-yield savings account, or if you’re an investment management client, a Hesperian Cash Alternatives account where I can pursue the highest after-tax yields I can find without taking on too much investment risk.
Looking for more ways to simplify or want to talk through your strategy? Reach out to me anytime to discuss it!
All content presented in this article is for informational purposes only. Materials presented should not be interpreted as a solicitation or offer to buy or sell a security or the rendering of personalized investment advice, which can only be provided through one-on-one communication with a financial advisor. The content reflects the opinions of Hesperian Wealth LLC (HW), except where cited, which are subject to change at any time without notice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All information or ideas provided should be discussed in detail with a financial, tax, or legal advisor prior to implementation.
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