Different kinds of accounts where you can keep your money … and how to use them. This is the way I do it.
Checking account (for day-to-day expenses). Even if it’s only used to fund ATM withdraws, debit-card purchases, and online bill paying, everyone should have a “checking account” — despite the fact that many people don’t even have blank checks these days, and the last time I purchased blank checks I probably got enough to last the rest of my life. A checking account is for your usual day-to-day bills. It should have enough money to cover transfers to your savings account (pay yourself first) as well as your regular monthly expenses, such as the rent or mortgage payment, and bills for utilities, groceries, transportation, and other things that you pay for every month. Whatever spending comes out of your checking account should be replenished by income coming in. (Did you see the post about how the money in your checking account is like a tank of water?)
In addition to your checking account for expenses that come due every month or more frequently, you should also have separate accounts for expenses that come less often. The first three, like the checking account, should be at a bank or credit union. The last one should be with a mutual fund company so the money can be invested in stocks.
Short-term savings (once-per-year expenses). Money set aside for foreseeable and predictable expenses that come once per year, such as birthdays, holidays, and vacations.
Medium-term savings (once every-several-years or just a few times per lifetime). Money for foreseeable, but perhaps not predictable, expenses that come less often than yearly, such as an automobiles, refrigerators, heating and air conditioning systems, washers and dryers, or new roofs. Other medium-term savings goals might include weddings, houses, college educations for your children, or starting a business.
Emergency savings (unexpected expenses). For unforeseeable expenses: accidents, medical problems, periods of unemployment, and special opportunities.
Long-term savings (once in a life). For foreseeable expenses that come just once in your life, such as buying your dream house and retirement.