How Many Bank Accounts Should I Have?
Quick answer - It depends.
While I’m sure that someone will disagree with me, I firmly believe that every serious money nerd should have at least 7 accounts.
SEVEN!
Yes.
However, if you are not (yet) a business owner, then you can get away with a four-account banking system.
Here’s the breakdown.
Why Wealthy People Keep 7 Bank Accounts
Like I said, some of these will only apply if you own a business. So, let’s start there.
All 7 accounts you need to have in your name as a business owner in Canada.
3 Account Banking System For Businesses
Transaction AccounT
Typically, this is what they called a “chequing account” or (“checking” account if you’re American).
This is where you get paid and this is where you pay people from.
You will likely use a credit card for all of you business purchases, but that balance will be paid from the transaction account.
Pick a business chequing account that allows for a high number of transactions each month. You don’t want to be killed with fees for depositing money frequently.
If an account with a higher transaction limit is not available, try to batch deposit your income once or twice per month.
Also, avoid business accounts that require a large minimum balance. Again, this will help you avoid fees.
Profit Account
If you want your business to grow, be deliberate about it.
By establishing a profit account, you not only make growth a priority, you make it visible and addictive.
Move a designated percentage of your net profit into this account at the end of every month.
As the sum grows on your bank statement, you will gain two things.
1) Momentum: Seeing money accumulate is highly motivating. When your dollars begin to stack up, you will be inspired to keep building!
2) Security: A layer of safety will begin to form around your company. Having cash on reserve is invaluable, especially when you are still growing.
In the profit account, you will essentially keep your business’ emergency fund and your growth fund.
Money You Owe Account
Taxes, payroll deductions, and big expenses you need to save up for - Put ‘em all in here.
Technically, these is your mid- to long-term accounts payable. But this is my blog, not accounting class 😋
If you take anything away from this article please remember this.
Never blow the re-up money!
🤓Translation: If you accidentally spend money you should have budgeted for your operating expenses, your business will cease to operate.
The best way to avoid spending money that you owe the government is to keep it separate.
4 Account Banking System For Personal Finances
Here are four more accounts that every adult over the age of 18 should have in their name.
Everyday ChequinG Account
As in business, every individual is going to need a chequing account.
This is where your direct deposits will go, where you’ll cash cheques, pay bills, wire money, etc.
Setup automatic withdrawal of your bills, so you never miss a payment.
When choosing a chequing account, be sure to take into account the number of transactions you do (on average) each month.
Avoid over-paying on fees whenever possible.
This one is simple. Just try not to let this account bleed you dry with service charges and fees.
High-Interest Savings Account
This is where you keep your cash cushion.
You have likely heard of an emergency fund. If not, read my article on the 3 rules of money.
The “Cash Cushion” is the combination of your emergency fund and your transition runway - The dough you use while navigating a career change. Every athlete needs one of these!
You’re not going to touch this money for a long time, but if you get in a car accident or get laid off it should be easy to get to.
What to look for in a good high-interest savings account:
Best interest rate
Low minimum account balances
Low or no transaction fees
A credible bank (No one wants their money disappearing because their bank went bankrupt.)
Tax-Deferred Retirement Account
This is your Registered Retirement Savings Plan or Registered Pension Plan.
I’ve got one of these through my employer, who so graciously matches my contributions dollar-for-dollar (up time a certain amount, of course).
Tax-deferred retirement account come with great tax benefits to you.
When you contribute to this account you are paying your future self - With interest!
If your employer doesn’t offer a retirement plan, you can set one up yourself through your bank or through a discount brokerage like WealthSimple or Questrade.
WealthSimple Trade is Canada’s first $0 commission stock trading app - Use this link to sign up we’ll both get $5 to trade when you fund your account.
Tax Free Savings Account
Honestly, they shouldn’t even call them tax-free savings accounts because they are best used for investing!
All of the money you contribute to your TFSA has already had taxes deducted from it, so the government allows you to keep 100% of the interest and capital gains made in this account.
Don’t leave those gains unclaimed.
Each year, from your 18th birthday onward, you gain additional contribution room to your TFSA.
The benefit of the TFSA as opposed to the tax-deferred accounts we talked about earlier is, you can access the money in your TFSA penalty free whenever you want.
Just keep in mind that you cannot add back money that you withdrew in excess of your total contribution lot it for the year.
However, if you wait until the following year, you will gain back all of your unused contribution room.
These rules make a TFSA great for medium to long-term investment plans.