Today we are going to talk about intentional banking structures. Could I have picked a more exciting topic or what? If you’re asking yourself what does intentional banking structures mean, that’s why we’re talking about it.
If you are like 97% of the population, you probably never intentionally set up the structure for your bank accounts, loans, or credit cards. Maybe your parents opened up a checking or savings account for you when you were a child. Or perhaps you got a savings or checking account in college because it was free or they came with some bonus features. The bottom line is we accumulate accounts over time but don’t set them up with any intentionality to help us with the financial goals that we wish to achieve. So often, the structure of our current accounts may be where we deposit money in an account, and we move it between others without thoughtfulness. You may even try to save money in a savings account, but then you overspend your checking, so you have to move that money back, which is demoralizing.
We’re going to discuss how to intentionally set up structures so that they can serve you based on where you are in your financial journey. There are three categories for structure management: the beginner, the intermediate and the advanced. So let’s go dive in with the beginner structure. The beginner structure is beneficial for someone who doesn’t have their financial shit together at this point. The beginner may be someone who overspends on credit cards, isn’t able to pay off all of their credit cards in full each month, may have a little bit of savings, but doesn’t track where money is going, or spends based on how much money is in their checking account.
Beginner Intentionality Strategies
The first thing someone in this category needs to do is stop using credit cards as much as possible. If you can stop using credit cards entirely, this is great. If not, limit your credit card spending only to your fixed recurring bills that you can anticipate. Unless you’re bumping up against your credit card limit, it’s hard to tell if you are overspending or how much you are spending. By using a debit card instead, you can limit your spending to the amount available in your checking account. This method puts a bumper on how much you spend so that you don’t fall into the problem of spending more on your credit card than you have available in your bank account balance.
The next step would be to add in a second checking account. Your first checking account would be for fixed bills only, and your second account would be for variable expenses. This strategy does a good job of separating money for your fixed bills–to make sure that you always have enough money for that–from your variable expenses. And because you firewall those two, you make sure that you don’t run out of money for your bills, or ideally, your variable costs.
Intermediate Intentionality Strategies
People in the intermediate category can save consistently and pay off their credit card bills every month in total. In this case, we don’t have to limit that person from using a credit card if they can do so responsibly and pay it off at the end of every month. But we still want to add some additional complexity in there to help them get more visibility around not just what they’re spending but what they’re saving. This person has two checking accounts for fixed bills and variable expenses, but in this case, they could use their credit card for more than just the fixed bills. And what they would also do is set up different savings accounts for other goals. If you’ve ever tried to save for something short term, like an upcoming trip, and you just put it into a general savings account that also has money for a down payment on a house or a six-month emergency fund, it can be hard to tell how much money is saved for that specific event. So what you can do is open separate checking or savings accounts for specific short-term goals.
These short-term savings goals are known as sinking funds because you sink money into those funds over time and pull money out when necessary. Sinking funds into different accounts is a helpful way to separate money for your particular goals that you will be spending over the short term. So if you had a $5,000 European vacation coming up, you could open a separate checking account and put $500 a month towards it. Because checking accounts come with debit cards, they will have a card that you can pay expenses towards that vacation or check the balance to see if you’re on target.
Advanced Intentionality Strategies
Couples primarily make up the advanced category of intentional accounts because they usually have two checking accounts and long-term savings and short-term savings accounts. There may be more accounts such as his, hers and theirs personal spending accounts. They also might have more complexity in terms of loans: student, home or HELOC (Home Equity Line of Credit)–that’s a conversation for another day.
The most common feature for people in this category is multiple-use accounts. Those in this category have to decide how to move money between their joint checking and personal spending accounts.
This post was adapted from an episode of the Fireside Financials series. If you’d like to check out the video, you can watch it here!