The 3 Most Important Accounts To Your Financial Foundation

Having total control over cash flow is a critical step toward optimal financial wellness, yet it proves to be more elusive than we’d like. Why is it that cash management seems to be so easy for some people, and yet so hard for others? Is it simply a matter of income—the more I have the less difficult it is to manage—or is it something more than that?

According to our research, 73% of employees say they have a handle on cash flow, but only 50% say they have an emergency fund. That means the other 50% are one unexpected event away from financial hardship. So how do we go from wishing nothing bad to happen to being totally confident no matter what life throws our way?

It starts by having a firm financial foundation. Here are the three most important financial accounts you will ever need:

Account #1: a checking account

It may seem odd to think of a checking account as one of the three most important accounts you will ever need, but the checking account is a fundamental building block in your financial foundation. Your checking account is where you can directly deposit your paycheck, and it should be the account used to pay all of your planned, regular monthly expenses (e.g., food, housing, utilities).

Which checking account is right for you? Check out these blog posts for ideas.

Account #2: a savings account

If you thought a checking account was a silly example of a critical account, then you’re probably thinking a savings account is even more silly—but hear me out. I agree, a savings account is a silly place to save money, but it is a FANTASTIC place to spend money. In other words, don’t treat it as a savings account; treat it as a spending account.

Your checking account is a great place for money you know you’re going to spend every month, but what about the money you know you’re going to spend three months from now; or six months from now; or nine months from now? (You get the picture.) Your savings account is the perfect place to put money aside that you know will get spent soon, just not necessarily this month. That’s why we like to refer to it as a Planned Spending Account, because it is money you’re planning to spend. (Yes, we are very creative.) Others refer to it as “lump sum” savings. Whatever you call it, it’s probably one of the most overlooked accounts, but it can be very powerful when it comes to managing cash flow over the course of a year.

Account #3: an emergency fund

Well, if you have a checking account for planned, regular monthly expenses, and a savings account for planned, irregular, nonmonthly expenses, then what do you think this third magical account would be used for? You got it: UNPLANNED expenses.

Most of us know we should have an emergency fund for unplanned expenses, but what exactly would qualify as an “unplanned” expense? That’s a good question, and the best I can answer is to suggest that an unplanned expense is any expense that we would typically NOT plan for. (I told you we were creative.)

For example, I do NOT plan to crash my car into a tree, but I know that if I do I’ll have to pay a deductible on my auto insurance. I do NOT plan for my children to get sick and have to stay home from school, but I know that if they do I may have to miss work or find a last-minute care taker. I do NOT, necessarily, plan to lose my job, but I know that if I do I’ll still have mouths to feed until I find work again.

It’s important not to confuse “urgent” with “unplanned.” Fixing the car when it breaks down can be urgent, but no matter how old or new your car is you should save for car repairs and maintenance. Losing income due to illness or injury can be urgent, but you should carry adequate disability insurance to protect against such risk. Visiting the emergency room can be urgent, but you should save for health insurance deductibles in a planned spending or health savings account (HSA).

Financial experts don’t always agree on exactly how much you should have in your emergency fund, which is why I often tell people it’s really just a matter of how big of an emergency you want to be prepared for. That said, here’s a calculator that might help you determine the right amount for you.

Where’s the best place to keep an emergency fund? Check out these blog posts for ideas.

When it comes to building a structure that can withstand the forces of nature, triangles are the strongest shape. Why should building a financial foundation be any different?


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