A Guide to Efficient Banking
tl;dr – Checking accounts are over-used. You should keep most of your money in a high-yield savings account and use credit cards for all of your purchases. The credit cards should AutoPay from your savings account. Checking accounts should only store money you might need for immediate transfers, such as ATM withdraws or Paypal/Venmo.
A Guide to Efficient Banking
“Efficiency is intelligent laziness”
I’m a very lazy person. However – I’ve found a system for my finances that works well for me. It’s easy to manage, and I believe it to be a significant improvement over “typical” banking.
When I say typical banking, this is what I mean:
- Checking Accounts: Used for money you plan on spending (bills, food, gas, etc.)
- Savings Account: Used for money you don’t plan on spending anytime soon (emergencies, retirement)
- Credit Card Account: Used for purchases you can’t afford but have to make – avoid if possible (hospital bills, car repairs)
If you agree with ANY of those 3 statements, you may benefit from this post. If you’d like to skip the storytelling, scroll down to the “Efficient Setup” section.
“Are we doing this because it’s right, or because it’s the way it’s always been done?”
This is one of my favorite questions to ask during meetings at work, and I recently found myself asking the same question about my bank accounts. In order to accurately answer this question, I decided to analyze the different types of accounts and track my thoughts.
Breakdown: Checking Account
There is no limit on monthly transactions. Money used in purchases immediately leaves your account. ATMs allow you to withdraw cash. Account balance typically accrues little to no interest.
- A checking account is like a ‘digital wallet’. It’s almost identical to carrying around cash. I can’t spend cash I don’t have – cash leaves my wallet as soon as I spend it – I don’t earn cash by leaving it in my wallet.
Breakdown: Savings Account
There is a limit of 6 monthly transactions. Money used in purchases immediately leaves your account. Account balance can accrue higher amounts of interest.
- Woah – the interest rates on these accounts are nice. If I had a debit card for a savings account, and if it weren’t for the monthly transaction limit, I wouldn’t even need a checking account.
Breakdown: Credit Card Account
There is no limit on monthly transactions, but there is a limit on monthly spending. Money used in purchases stays in your account until the credit card payment is made. Rather than gaining interest, you risk being charged interest if you don’t pay the full statement balance. If you can’t make the minimum payment, there are other fees as well. To motivate usage, many credit cards have a “rewards” program for points or cash back. Some credit cards also have signing bonuses – such as a period of low interest or an ‘initial spending’ reward. Like most “bills”, allows for Automatic Payments. Proper usage builds credit history, which may help in future financial situations.
- Being charged fees for missed payments is scary, but if I set up automatic payments than I should be fine. I don’t want to be charged interest either, so I definitely don’t want to make any purchases I can’t afford paying off immediately. The signing bonuses and rewards are enticing though, and I want to improve my credit score.
After breaking everything down – I started trying to piece it back together. The “typical banking” routine didn’t hold up. Rather than only keeping a subset of funds in a savings account and avoiding credit cards, it would be much better to only keep a subset of funds in a checking account and utilize credit cards for all purchases. This would maximize cash back rewards and maximize interest earned on money. Not only that – since a credit card transaction doesn’t immediately remove the money from your account, the money will accrue interest in the savings account for longer.
The “Efficient” Setup
- Checking Account: Used for money you may need to use immediately. For example, ATM withdraws and Paypal/Venmo Transfers. I almost never have these types of transactions, so I keep about $150 in my checking account.
- Savings Account: Used for all money that isn’t in the checking account. Use for Automatic Payments to your credit cards, adding more funds to your checking account, and transactions that can’t go on the credit card (maybe rent, car payment, credit cards)
- You can open multiple Savings accounts if it helps you track specific savings goals, or if you need more than 6 monthly transactions you can’t make on a credit card.
- If you aren’t lazy, you might want to take a portion of this money and do other fancy finance things instead of letting it stay in a high-yield savings account
- Credit Card Accounts: Used for as many transactions as possible to maximize cash back/rewards. You only need 1 card for this setup to work, but you might benefit from having multiple cards.
Checking Account: I use Charles Schwab for my checking account. It’s an online bank with no monthly fees, unlimited ATM rebates, and 0.40% APY interest. I never really deal with cash, so I am fine with an online bank. This bank plays well into my expected usage of the account.
- Read More: https://www.schwab.com/public/schwab/banking_lending/checking_account
- Note: If you can get a referral code, Schwab will give you $100 after 1 month of having your account open.
Savings Account: I use Ally for my savings account. It’s also an online bank with no monthly fees. It currently offers 2.18% interest, compounded daily, which is estimated to be a 2.20% Annual Percentage Yield.
Credit Cards: I use 3 different credit cards. You should find the right credit card(s) for you, but here is what worked for me:
- Citi Double Cash
- This card gets 2% cash back on all purchases. I use this card for monthly bills (power, internet, phone) and any purchase I don’t use another card for. If you only wanted to use 1 credit card – this would be my recommendation.
- Read More: https://www.citi.com/credit-cards/credit-card-details/citi.action?ID=citi-double-cash-credit-card
- Barclays Uber
- I use this for 4% on dining and 3% on hotels/airfare. It also has a signing bonus – spend $500 in the first 90 days for $100 cash back. If you’re planning on applying for multiple cards – apply for this one first. Barclays is picky. I have a good credit score, but I was still denied. I called their reconsideration line and was approved after a 2 minute phone call.
- Read More: https://cards.barclaycardus.com/banking/cards/uber-visa-card/
- CapitalOne SavorOne
- I use this for 3% on entertainment and 2% on grocery. It also has 2 signing bonuses. First, spend $500 in the first 90 days for $150 cash back. Second, 0% APY for the first 15 months. I’m “budgeting” the full statement balance on this card, but only making minimum payments during the 0% APY period. If I had outstanding credit debt, I would have done a balance transfer to this card (3% fee) and then paid off as much as possible when the 0% APY period ended.
- Link: https://www.capitalone.com/credit-cards/savorone-dining-rewards/
I’ve been operating like this for a couple of months now. I had to do some work up front, to open the accounts and change my direct deposit account info, but that wasn’t too bad. I also had to change my payment info for my monthly bills. My rent charges a $25 fee if I use a credit card, so it pays straight from my savings account. After that, all I had to do is use the right card for the right purchase. The automatic payments take care of the rest. I’m only using 4 of my 6 monthly transactions for my savings account.
This setup won’t make you rich, but I guarantee it will be better than “typical” banking. It will save you 2% to 4% on almost all of your purchases and will earn you ~2.2% APY on more of your money. Since it’s a percentage-based difference, the benefit is different for each person and is also different month-to-month. The best part is how simple it is. Once you get it set up, it’s mostly automated. Just use the right card for the right purchase, and don’t spend money you don’t have.