When you go into the bank for the first time, they likely opened two accounts for you: chequing and savings. Although these accounts are necessary to have, they are not the only ones. In order to set yourself up for financial success later on, you have to have savings for different occasions, retirement, and a way to pay your bills, among others. It is important to do your own research to see what banks accounts could benefit you and your personal financial situation. Here are five accounts that could be helpful for you to open in your twenties (or any time!).
This is the most basic account, and likely the first of your accounts that the bank opened for you. A chequing account is where your salary is deposited into from your employer, and where pay your bills and daily living expenses. Most chequing accounts do not earn you interest on the money left in them, so it is best to only keep enough to pay your bills, daily expenses as well as an additional small buffer. It is not necessary to have more than one chequing account, although some people choose to have two or more.
Emergency Fund Account
An emergency fund account is the most important out of all your bank accounts. An emergency fund should be spend on emergencies only. What constitutes as an emergency will vary for each individual. However, common emergencies can be: your car breaks down, you need a new water tank, your pet gets sick, or you lose your job. It is important to have enough money in your emergency fund to cover emergencies so you do not go into debt.
How much you should save in an emergency account is dependent on the person and their situation. For example, if you own your own home or have dependents, you should have more saved than a single renter. It is a good rule of thumb to save six to nine months of expenses in the case of an emergency. The more you can save, the less you will have to worry if anything happens.
It is best to store an emergency fund in a bank account separate from your regular banking institution. This will remove any temptation to transfer over money by the click of a button. I choose to store mine in an online bank in a high interest savings account. This way, my money is still making money simply by sitting there.
A retirement account is a necessity for everyone to have. If you are employed, you may have an employee retirement savings account offered by your employer. However, this is often not enough to live on during retirement. If you are self-employed, or simply want to have extra savings, you will have to open your own account. In Canada, a RRSP or Tax Free Savings account are two of the more popular retirement savings.
With retirement savings, you will be reaping the benefits of compound interest. It is important to start saving early. Even if you cannot save a lot in the beginning, you will be able to benefit from compound interest. Even $50 per month when just starting out will make a big difference in your retirement years. However, when you’re able to, start making larger contributions to your retirement fund.
Sinking Funds Account
A sinking fund is a savings account for a specific purchase or experience. Personally, I have three sinking fund accounts: new vehicle fund, home down-payment fund and a furniture fund. I choose to keep these in an online bank separate from my regular bank. This way, I don’t have the temptation to spend the money frivolously on things the money wasn’t meant for. However, I still have easy access to the money through an email transfer when it is time to make my purchase.
How much you choose to keep each one of your sinking fund accounts is a personal preference. It fully depends on how much the item or experience will cost that you are saving for. It is also a good idea to store your sinking fund in an account that is high interest. To learn more about how a sinking fund can be incorporated into your monthly budget, click here.
Tax Savings Account
This account isn’t a necessity for everyone. If you are responsible for paying your own taxes each year, you need to be saving up for them. If you’re not saving, it could be a large sum of money that can derail your financial goals.
For example, I work for VIPKID. For tax purposes, I am classed as an ‘independent contractor’. This means, VIPKID does not do anything for my taxes. I am payed my wages, and it’s my responsibility to pay my own taxes at the end of the year. Each month, I set aside $300 in a savings account to pay my taxes. At the end of the year, this would leave me with $3600 plus interest.