Accounting For Different Kinds of Accounts


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, de

bit-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 money 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 automobile, refrigerator, heating and air conditioning systems, washer and dryer, or a new roof.  Other medium-term goals might include buying a house, college education 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.


The Saving Road to Independence

Here’s inspiration from a century ago from The Baltimore and Ohio Employees Magazine (February 1916):

The Saving Road to Independence

For Men and Women of Limited Salary

DEBTS accumulate rapidly. Savings accumulate just as rapidly! It’s therefore a matter of determination, first, whether it shall be savings or debt.

Money will either serve or rule you. The minute you save your first dollar and begin to think of safe investments you are master of the situation. So reflect NOW. Do not regret later.

saving_roadMany people today are closing the door of opportunity by failing to lay aside some part of their earnings—thus condemning themselves to a life of continuous hard work. Your problem is one of persistence, not one of existence. So be up and doing!

Saving is the springtime of prosperity. To be effective, it must be practiced daily. It’s the steady, consistent, aggressive saving that makes men and fortunes. Save to the limit of your possibilities!

It is not enough to make money. You must make your money work for you. Putting your money to work means investment, and investment cannot begin until you have learned, or until you have an earnest desire to learn, to save.

Economize, but in the right manner. Avoid foolish, extravagant expenditures; save your money and invest it carefully while saving. You will always be in a position to live well and view the future complacently. Isn’t it worth while? A man who has always intended to start tomorrow has nothing. He is a slave to pay day.

Every dollar you save and invest brings you just one dollar nearer the goal of prosperity—the time when interest on your investments will provide for your comforts.

Prosperity begins when a man invests his savings or surplus capital intelligently. The man who saves his money will always have an opportunity to invest it. If he invests wisely, he will soon become a man of means and of credit.

Be prepared! Being prepared is half the battle. More men and women learned the value of ready money during the last financial depression than ever before during a similar period. Cheap investments abounded on every side and a man with ready money was master of the situation.

What of tomorrow? Are you prepared for it? For any emergency that may arise? Commence TODAY to fortify yourself against sickness, misfortune or financial difficulty, by saving and investing your money systematically. There is no time to begin like now, which, spelled backwards, means success.

Work hard! Plenty of work is your greatest need. It keeps your mind clear, your body strong and your appetite good. And see that your work accomplishes something. Your days are numbered— your earning period is short. Make each day show a satisfactory result. The best results are obtained when you save, invest and realize.

Nothing makes a feel safer, happier and more courageous for life’s battles than a nest egg in the shape of good investments. It destroys fear of a rainy day and enables him to grapple with the big things.

If you have failed so far to lay aside any money, try again today.

To be a capitalist it is not necessary that you have several thousand dollars in the bank. A man with five dollars is a capitalist just so soon as he decides to make that five dollars work for him—to place it so that, with other sums he may add to it regularly and systematically, he will save, invest and realize in the shortest space of time consistent with safety.

Remember that interest in our work means interest on your money. Get the habit of doing things! Go it alone! You can succeed.

Homeowners: Pay Property Taxes and Insurance Yourself

Generally, home mortgage payments consist of 4 parts:

  • principal (a partial payment toward the amount that was initially borrowed)
  • interest (the cost of “renting” the remaining loan balance)
  • property taxes
  • insurance

mortgageWhen someone borrows money to buy a house, the lender has a good reason to want to make sure that the property is insured and the taxes are paid.  (If the house were destroyed in a fire or other accident, the lender would have no way to collect the debt if the borrower walked away.  If the taxes aren’t paid, the local government could seize the house and sell it to pay the unpaid taxes.)  Because lenders prefer to make sure that insurance and tax bills are paid, and paid on time, they include those costs in the monthly payments and pass the money along to the insurance company and local government as needed.  The money is kept in a separate “escrow” account in the mean time.  Federal Housing Administration (FHA) loans always come with an escrow account and include insurance and taxes in the payments.

Many homeowners like escrow accounts just fine.  It’s convenient.  Not making insurance and tax payments means two fewer things to worry about.  Someone lacking in financial discipline might not be able to put enough money aside for the tax and insurance payments, and that could lead to trouble.  Simply forgetting to make the payments can lead to late fees, or worse.

However, someone who is able to manage their money and wants to spend a little extra time doing so might want to consider a no-escrow loan.  While this does not reduce your taxes and insurance costs, it does let you keep your money in your own account until you need to make the payments.  This might allow you to earn some interest from the bank (or credit union!) where you keep your checking and savings accounts.  Additionally, you might more easily meet some minimum balance requirement that eliminates monthly service charges.

It’s usually easier to avoid escrow on a new loan and harder or impossible to remove an escrow requirement from an existing loan.  Even if you can avoid escrow, watch out: banks might charge a higher interest rate on a no-escrow loan.  As always, shop around and negotiate.

Inspiration From Youtube

As I’ve mentioned elsewhere, your thoughts become you deeds.  Thus, if you control your thoughts, you end up controlling your deeds.  That’s called self-control and it’s essential if you want to reduce your spending and thus be able to increase your saving.  One way to control your thoughts is by listening, reading, and watching media on the subject of personal finance.  You can find podcasts and radio shows, books, and (of course) videos.  Here’s an example.

Maybe not everything mentioned in this video is applicable to your situation.  Okay.  So find another video.  You know how to work the internet don’t you?  Then you can find books at the library or among the used books at your local thrift shop.

Finally, I’ll mention that as you get lots of personal finance advice from a variety of sources, some of what you’ll hear or read might be not only not applicable to your situation … it might also be downright incorrect or untrue.  But that’s okay.  If something isn’t true, remember that free advice is sometimes worth what you pay for it.  And it isn’t just the actual factual content that you’re looking for.  It’s also the inspiration that comes from seeing and hearing someone else talk about doing what you want to do.  Just knowing that other people have done it should show you that you can do it too.  That’s one reason why The Richest Man in Babylon is still one of the best books about personal finance, despite the fact that it’s almost 100 years old.  So get inspired and save money!

Spending is Like a Faucet

An old song says “Love is like a faucet … it turns off and on”.*  Spending is like a faucet too.  It can be turned off and on.  Or it can be set to any spending level between the off and on extremes.

We can extend the imagery a bit.  Let’s say the spending faucet is attached to a storage tank.  Income is like water flowing thru a pipe into the tank.  Spending (in other words, buying things that are sure to decrease in value, such as automobiles, clothes, food, furniture, etc.) is water flowing out of the tank through the spending faucet.  The amount of water in the tank is accumulated wealth.

Spending = Income


Is your situation like the first image?  Money is flowing into the tank (as income), but it’s flowing out (as spending) just as quickly. The tank will never be filled.  There will never be any accumulation of wealth.  This will be true as long as spending = income.

Note that as long as spending = income is true, the tank will never be filled — no matter the amount of income.  This first image could represent a person with an income of $20,000 per year and spending of $20,000 per year.  Or it could just as well represent someone with an income of $20,000 per day and spending of $20,000 per day.  No matter how high the income, people who spend all they earn — people who are unable to live below their means — will never have wealth.

Sadly, this is how many people live their whole lives.  They wonder, like Senator Hoar, why they can never get ahead.  In some cases, I believe, the people are doomed to financial failure because they can’t even imagine, or they’ve never been taught, that there is any other way to handle their money.

Spending < Income


The second picture is clearly different.  The tank is filled, representing an accumulation of wealth.  Look at the picture for a moment and you’ll see why the tank is filled, and will stay filled:  The spending faucet has been adjusted so that spending has been reduced.  Spending is now less than income (spending < income).

Also notice that the tank has another pipe.  The new pipe leads to saving and investing.  We can think of the tank as a checking and savings account at a bank.  The saving and investing pipe leads to retirement savings accounts, stocks, bonds, IRAs, 401-Ks, and other investments.  Buying shares of stocks or mutual funds might be thought of as “spending” but there’s an important difference: it’s buying things that have a good chance of increasing in value.

If your personal financial situation is like the second picture, then you have learned the lesson of living below your means and allocating part of your earnings for savings and investment.  If your situation isn’t like the second picture, then there’s an important lesson you need to learn.  Start today.


Here’s another image, which is the best way to think about the financial plumbing.  It’s basically the same as the second picture.  You can see that spending < income because the tank is full.  But, by using the pipe at the bottom to represent saving and investment, and the pipe at the top to represent spending, the third picture represents the application of another important principle, which is, “Do not save what is left after spending, but spend what is left after saving” (Warren Buffet).


Old, But Good, Advice

Browsing through an old issue of The Sabbath Recorder (A Seventh Day Baptist Weekly, published by The American Sabbath Tract Society, Plainfield, N.J., vol. 76, No. 10.), I found some financial advice from Charles Grant Miller in the form of a story. This was reprinted in the March 9, 1914 edition.

The Saving Habit

They tell a story down in Washington about the late Senator Hoar’s improvidence. A rich friend was riding to the Capitol with him on a street-car, and Mr. Hoar was expressing wonder at the ease with which some men acquire wealth.

“I have had a good income all my life,” he explained, “but never have been able to get ahead. I would like to know how money is accumulated.”

At that instant the conductor came along and Mr. Hoar handed him a nickel while the rich friend turned over a ticket.

streetcar_ticket“There is one way in which you might acquire money.” said the friend. “You could save twenty per cent by buying six tickets for a quarter, and that is a pretty good investment. The habit of saving money grows upon one, and that is a better investment still.”

This is a good deal more than a jest.

The oversight of small investments lying close at hand leads to half the world’s financial miseries.

Of course, none could get rich by investing in street-car tickets. Nor can one get rich merely through small savings in a bank. But it is generally found that the investment in street-car tickets and the savings in the bank go together, and with them go a lot of other frugal habits.

There is no more flexible law of nature than that one frugal habit begets another, and that frugal habits beget riches.

We hear of great fortunes made in a moment. But that is not the common way.

Ordinarily a great fortune is built up like a stone wall — a stone at a time.

The young man who declines to lay the first stone, because it comes so far short of a wall, will never make progress in financial masonry.

It is a sure thing that the young man who considers it not worth while to save small amounts will never have large ones to save. He is first cousin to him who declines to go to work until he can start in at a big salary.

The first savings of Mr. Rockefeller, Jay Gould and the first Vanderbilt all look pitiably small, even to the average laborer of today. But they were seed from which sprang not only increased profits but increased enthusiasm in business-building.

Small savings and investments if constantly added to and the income compounded, grow marvelously in time.

And the saving of money is a habit that grows more marvelously even than compound interest.

— Charles Grant Miller, in Watchman-Examiner.

There’s a lot of good food for thought in that story.  Let’s look at it point by point.

Income Alone Isn’t Enough

“I have had a good income all my life,” he explained, “but never have been able to get ahead….”

As long as spending is equal to income, there will never be wealth.  This is only common sense.  Or, rather, I should say, it should be common sense.  But actually, it’s amazing how uncommon this bit of wisdom is.

Imagine a water tank with water flowing into it thru a pipe at the top.  If there’s another pipe at the bottom of the tank, then the tank will never be filled: The water goes out of the tank as quickly as it goes in.  Now imagine the pipe at the bottom has a valve that can be used to reduce the amount of water going out of the tank.  If the valve is set to allow only 90% of the water to exit the tank, then the tank will fill with water.

Checking accounts work the same way.

If people spend 100% of all they earn each year, year after year, what will they have accumulated when they stop working?  Think about it.  The answer, of course, is … nothing; those people will have nothing.  (And if spending is greater than income, that’s real misery.)

Don’t be one of those people who end up with nothing.

The best way to accumulate wealth is to live on less than your income and regularly save some percentage of your income and invest it so it grows.  The Richest Man in Babylon recommends that you save at least 10% of your income.

Don’t Pass Up Good Deals

“You could save twenty per cent by buying six tickets for a quarter, and that is a pretty good investment….”

Whenever the savings you get from buying something* are greater than what you could otherwise earn if you had invested the same amount of money, then you should buy it.

In the example in the story, tickets cost 5¢ for 1 ticket, or 25¢ for 6 tickets.  If purchased one at a time, 6 tickets would cost 30¢, which is 20% more than 25¢.  There’s no investment that is certain to yield a 20% return; that was true in 1914 and it’s true today, and even moreso in the short time and with the small amount of money it takes to buy and use 6 train tickets (a rider might use 2 each day).

Apply this to your daily life.  Suppose you eat a can of beans each week — so once a month you buy 4 or 5 cans.  Now suppose the grocery store has canned beans on sale.  Say it’s buy 5 and get 1 free (like the deal on tickets in the story).  How many cans should you buy?  Your usual number, maybe 5 cans for a month of bean eating and get 1 free?  That’s okay, but not good enough.  Why not buy enough for a whole year?  Buy 50 and get 10 free!  They won’t go bad in a year.  (Check the labels.)  Remember, a penny saved is a penny earned.  Do you have any opportunity to earn a 20% return on the additional money that you’re spending on canned beans?  No.  The stock market won’t do that well, certainly not with 100% certainty, and neither will bonds nor savings accounts.  So, what are you waiting for?  Put those cans in the cart and get to the cash register!

Some years ago, a large grocery store chain closed the local store in my neighborhood.  For a couple weeks everything in the store was marked down 30%.  Then, in the final week, everything was 50% off.  My wife and I went to the store twice that last week and spent about $400 each time.  A total of $800 spent to get $1,600 worth of groceries.  It was mostly bottled, canned, and boxed goods, of course.  We were eating breakfast cereal, spaghetti, cooking oil, and canned beans from that haul for months thereafter.  But we doubled our money with those 50%-off purchases.

Every time I see a good deal on basic foods or cleaning supplies, I make it a point to stock up if I think I could use them within the next year.

* that means something that you definitely need and will use and won’t spoil or expire before you use it.

Make Saving A Habit

“The habit of saving money grows upon one, and that is a better investment still.”

Like lots of other things you should do — like eating right, exercising, being polite to stupid people — making a habit of saving money takes practice.  The more you do it, the easier it becomes.  Efficient use of money should be your goal, it should be foremost in your mind each and every time you buy something.  You can strengthen your money-saving habit by reading books and magazines, listening to radio programs and podcasts, and watching videos about personal finances.

Just as buying when you see bargains is a good financial investment, developing the savings habit is a good investment of your time and willpower.

… one frugal habit begets another, and that frugal habits beget riches.

The more you practice the efficient use of money — frugality — in one part of your personal financial affairs, the easier it will be to apply it to others.

Slow And Steady Is the Surest Way

We hear of great fortunes made in a moment. But that is not the common way.

It’s the unusual, the uncommon, that most often receives the most attention.  (As the saying goes, “1,000 planes safely land today” isn’t likely to be a newspaper headline.)   So, it’s the rare cases of people getting rich quickly that gets the most attention.  A fortune made slowly, acquired through years of working, saving, and investing is the more common occurrence, but you are unlikely to read much about it unless you make an effort.  Your best chance to acquire wealth, in fact, it’s almost a certainty, is the tried-and-true method of living below your means, spending less than your income, saving at least 10% of every dollar you earn, and investing the savings to earn long-term compound growth.

Accept the Fact That You (Probably) Have To Start Small

It is a sure thing that the young man who considers it not worth while to save small amounts will never have large ones to save.

Don’t wait until you have a large income to start saving.  Start now.  Right now.  Chances are good that your income will grow as you advance in your career.  But small amounts you save and invest now have the advantage of having more time to grow.  To grow the kind of personal fortune you’ll need to be secure after you retire, you will need to invest…

Small Amounts … … For a Long Time
Middle-size Amounts … … For a Mid-length Time
Large Amounts … … For a Short Time

Just remember, at least 10%.  That percentage of a small earnings will be a small amount, and as your earnings grow, that same percentage will be a larger amount of larger earnings.

The Most Important Thing to Remember

Small savings and investments if constantly added to and the income compounded, grow marvelously in time.

It’s all right there in one sentence

  • A small amount, just 10% of your earnings,
  • consistently put aside and invested,
  • subjected to the miracle of compounding.

That’s all you need to know.  That’s all you need to do.

Online Mistake Costs $70 (Which I Got Refunded)

I sorta like opening checking accounts (and setting up direct deposits and e-bill paying, maybe opening a savings account so as to avoid any monthly fee) just to get bonus of $150 or more.  One of the banks I’ve done this with offered me a credit card charging 0% interest for the first 12 months and paying me a $350 bonus if I charged $500 per month for the first 3 months.  I took the offer and earned the bonus.  All was going well until a few days ago.

I was online, making a payment, and I accidentally clicked the wrong button!  Instead of selecting to make a payment from the credit union where I keep most of my money, I accidentally selected the checking account at the same bank that issued the credit card.  I was paying off nearly the entire card balance (I guess it’s okay to carry a balance when the interest rate is 0%), which was a little over $1,000.  But I didn’t have that much in the checking account at that bank.  No matter!  Without any warning, the payment was made and the checking account had a negative balance.  I looked in vain for a way to un-do the transaction.  I was so flustered that I immediately made another mistake when I tried to transfer some money from the savings account at the same bank into the checking account, so as to partially offset the negative balance.  I accidentally did the transaction backwards, resulting in an even larger negative balance!  Finally, I transferred money from the credit union to the checking account at the bank (the money which I intended to use for the credit card payment in the first place) and I waited.
reverseJust as I feared, the next day there were two $35 service charges for insufficient funds.  Despite the fact that these accounts exist solely for the purpose of obtaining the bonuses for opening them, I felt pretty strongly about being charged $70 for just clicking the wrong button.  Especially when the bank’s online system didn’t give me any error message (“hey, you’re trying to make a payment of $1,000 from an account that only has a balance of $500”) or any way to un-do the transaction.

I did an online chat with one of the bank’s customer service people and, with sufficient amounts of politeness and contrition, along with the fact that I actually did transfer the $1,000 from my credit union account to the checking account at the bank, was able to get both fees reversed.

Moral of the story: Be careful not to click the wrong button. And, as is often the case with customer service, it often pays to ask.