Welcome (back) to our Six Stones series. Our financial adviser, Jordan, is sharing as many tips, ideas and advice for people going through a divorce as a humble blog will allow. He’s staying away from specific financial advice – it’s all general advice over here, be sure to get personal financial advice before doing anything – but we hope you find some useful information in here as you navigate through/out of your divorce.
In my last post, I talked about Louise’s current ‘accidental’ banking arrangements, and why being more deliberate about your banking can only be a good thing.
I also highlighted a few biases I have when looking at personal banking arrangements – biases that have grown over the years of helping people try to improve their situation.
Now – what does a ‘deliberate’ banking structure actually look like?
Recycling The Accounts
The good news is that because Louise has the usual accidental structure, she’s not going to have to make a lot of changes.
She will need four bank accounts:
1) A Needs account;
2) A Smile account;
a. This is for all the short-term Wants, the things that she’ll buy over the course of a month. This is her Smile pond – so things like coffees, meals out, clothes, anything that will make her happy, but that can be funded out of the short-term allocations.
3) A Joy account;
a. This is the Joy pond – where she’ll gather the money for those bigger, longer-term Wants. So we’re talking things like holidays, renovations, new cars or other big, shiny toys. Anything that she couldn’t fund out of her monthly cashflow, so it’s going to take at least two months to save up for.
4) A Buffer account.
a. This is the Safety pond. We’ll go into this in more detail in our Improve module, but this is where Louise will initially divert the flow from the Safety outlet. The pipe keeps flowing into this pond until there is at least one month’s worth of Needs saved in there.
And Louise can use three of her accounts – if they’re fit for purpose, of course.
So, her Spending account can be re-purposed into the Needs account.
Her Saving account becomes the Joy account, and her ‘other random account’ becomes her Buffer account.
Sure, she’ll then need to open a new one for her Smile account, but that’s ok – quite a few institutions will let her open an account online now.
What You Want From Your Accounts
I’m not going to get into the specifics of which account with which bank you should use.
But there are four main features you want to look at when considering your choices.
1) ‘Account-keeping’ or other monthly fees
Frankly, you shouldn’t be paying these. There are enough zero fee options out there to make these insidious things disappear. However, sometimes, you have to meet some other requirement (a set amount of deposits each month, for example) to have the fees waived.
2) Transaction Fees
These are irritating too, but you can’t always avoid them. At the very least, try to find accounts that either won’t charge you for using other ATMs – or that has a big enough network of ATMs that you won’t need to worry.
3) Interest Rate
This is important, but the way Australian rates are at the moment there’s really not much you can do. As a rule – try to get the highest rate possible, but not at the expense of higher fees.
How do you actually use your money? How’s their online functionality, their card options and the breadth of their ATM network?
Does their system allow you to track your expenses? Some banks now categorise your expenses for you (saving you plenty of effort in the Explore / Analyse / Diagnose phase).
Now, how should you prioritise these different features?
– For your Needs account, you want an account with very low/zero fees, which allows you to automate as many bill payments as possible.
The interest rate isn’t super important, as your money won’t be staying here for very long.
But the reporting function is really valuable, because this account will make up a large portion of your expenses – so categorising them automatically is really helpful.
– Meanwhile, for your Joy account – where you’ll be storing cash for a longer period – having as high a rate of interest as you can get is important.
But you won’t be making many transactions, so transaction fees and reporting aren’t as important.
– Same with the Buffer account. Ideally this would be with a different bank and you wouldn’t have any card or online access – I like having this set up so that you have to go into the branch (egads) to get your cash.
That inconvenience then discourages you from dipping into your Buffer.
But it’s important you access the highest interest rate you can, because this will/should have a growing pool of money, always just sitting there.
Now, our next post will bring this all together, and outline how you can set about getting these new accounts established – and what the ‘end product’ should look like.