Structuring your financial accounts

Within 30 seconds, could you tell someone where your money is and how much you have in each of your accounts? Often we have too many accounts, duplicate accounts attracting double the bank charges or a lot of money in non-interest bearing accounts. Setting up a financial structure which is simple and easy to follow is important. It gives you clarity and a sense of comfort knowing where your money is.

It matters where the money is

Although R1 is R1 no matter where you put it, where you keep it signifies what that money is for, what goal it’s trying to satisfy. It wouldn’t be wise to put money for a long term goal into a transactional, non-interest bearing cheque account. Money that isn’t for everyday transactions should be put safely away in a savings account for shorter term goals, and an investment account for longer term goals.

Accounts and the flow of money between them

When creating a simple financial account structure, there are some accounts you should focus on first, before opening any others.

The first account you need is a cheque account. This is for every-day transactions. When using this account you need to have a budget or spending plan in place. A cheque account is highly liquid — meaning you can withdraw from it when you like and you don’t have to put in notice. Cheque accounts are also non-interest-bearing. The funds need to cover a month’s worth of immediate needs and wants. After your monthly expenses come off, any leftover money should be put into an account that is better suited for savings. Ideally, you should budget for savings each month and if you think that it will be difficult to stick to a budget and maintain savings, it’s best to set up an automatic transfer that comes off at the start of each budget month.

There are many types of savings accounts — these include your basic savings accounts, Money Market accounts, Notice accounts and Fixed Deposit to name a few. You can set a goal for your savings account. If you are saving for a holiday or new car — i.e. a large purchase within the next two years, you may choose a different type of savings account compared to the one you choose for your emergency fund. An emergency fund/savings account should have three to six months worth of your expenses in it to cover for employment loss or unseen family emergencies. Funds for emergencies are the key to feeling and being financially comfortable and reducing stress come times like the Covid-19 pandemic.

After you’ve set up your cheque and savings accounts and the flow of money between them, you can look into applying for a credit account. This account needs to work for you, which means you need to use the account only if you are certain you can pay off the credit in the near future. We all know the financial problems debt can cause and it’s important to be wary of that. However, there are some very positive aspects to having a credit card account. They can be useful for earning rewards, cash back, flyer miles and building a healthy credit score. They are also less likely to incur losses from fraud than debit cards are.

Next up is a Retirement Annuity or Pension Fund account. You should try your best to ensure that you are maximising your tax-deductible contributions towards a registered retirement fund, such as an employer pension fund or retirement annuity. You can channel up to 27.5% of your taxable income towards a retirement fund on a tax-deductible basis.

And now, you are ready to set up your investment accounts. These are for long term goals and expose your money to the highest growth. As with savings accounts, there are many types of investment accounts such as a Unit trust (with any professionally managed fund such as Old Mutual, Coronation or Investec to name a few) or a Tax Free savings account. A tax free savings account (TFSA) is a must have investment account. It allows you to invest easily and tax efficiently. If you want to know more about Tax Free Savings accounts, check out our blog post “The best investment account

The last place where your money should flow into, is a self-directed investment account. This is an investment account which allows you deposit funds and place investment orders (usually buying and selling shares) with a licensed firm. You can do this yourself if you feel comfortable, but if not, it’s best to get help from a financial adviser.

Be accountable

Creating this simple financial account structure takes time. Slowly but surely filling up the various accounts starts with managing your expenses and incomes by using a budget or spending plan. Remember if you want a space where you can monitor and assess all your accounts in one place, 22seven is for you.

Written by Ross Reid

Thoughts, observations and insights. About money, life and 22seven. Visit 22seven.com

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