By Katherine Vessenes, JD, CFP® , Ben Kirchner, AAMS®

Audio Block

Double-click here to upload or link to a .mp3. Learn more

A lot of doctors might think that bank accounts are easy, basic, or even boring. However, bank accounts are the foundation of any financial plan. They can be easily overlooked, which is a big mistake.

Bank accounts, when set up and used correctly, start the chain of efficiency you want throughout all elements of your financial plan. If you can keep your bank accounts that way, then they are the most efficient and most effective for you long-term. It's going to reduce stress, make things seem like they're on autopilot, allow you to focus attention on other things that are more important in your life.

Here are our three tips to help you set up and run your accounts more effectively:

Tip #1: Choose the Right Checking Account

A lot of doctors, especially young ones or newly married ones will come to us with multiple bank accounts at multiple institutions and want to know what they should do with them or how to consolidate them. Ideally, you only have one or two checking accounts, and all your accounts have a purpose. Having fewer accounts will make budgeting easier and less stressful.

You should have one checking account with a good enough buffer that if anything were to come up, you'd have enough cash available to pay for it without going into any sort of credit card debt. This checking account is meant to just be a pass-through account. It's meant to pay your bills. It's meant to pay for things that come up day-to-day.

If you feel more comfortable with more checking accounts or are unsure how to combine your accounts at marriage, we typically see one of three ways.

Option number one, keep things individual. Some couples prefer the independence of this. You each own your own individual accounts and the benefits of having them at the same bank or credit union are, if you need to move money back and forth, it’s easy and there are no fees.

Option number two, open joint accounts. Some couples find this easiest. There's no argument as to which money is paying what bill. It's all coming in and out of one joint account.

Option number three, utilize “fun money” accounts. This is a method many doctors like. It has the independence of individual accounts and ease of joint accounts. In this case, they open two individual checking accounts and one joint. The joint pays all the joint expenses and bills and the individual accounts are for each individual to use as they want. This way you have some freedom to spend without feeling like you need to consult with your spouse. It’s also helpful if you're going to buy your spouse a gift, they can’t see the expense.

As far as where these accounts should live, you have two options: banks or credit unions. Each option has their pros and cons.

Banks are going to offer more brick-and-mortar locations, especially with national banks. However, banks are typically owned by shareholders who need to make a profit and pay to keep their locations open. They’ll charge fees and typically their interest rates are much lower than those offered by credit unions. Banks may also charge fees for not meeting certain account criteria. These can be X amount of transitions per month on their debit or credit card, X amount of direct deposits into the account, or minimum balances.

Credit unions don’t offer as many in-person locations and are owned by their members. This means that, as a member, you're going to get benefits. You get a little bit of a say in terms of what goes on with that credit union and you’ll get some incentives. This could be positive incentives for X amount of transactions per month on their credit or debit card or X amount of direct deposits into your account. They also usually have accounts with higher interest rates than what banks can provide.

When making the decision of where you want to have your accounts or how you want to set them up, it’s important to consider what you need and what the “rules” of the accounts are at each option.

Tip #2 Choosing the Right Savings Account

This is one of the big topics that has really blown up in the last few years, but it's one we've been talking to clients about for almost a decade - having a savings account that's going to pay you a beneficial amount on your savings.

This is where I would make some exceptions to the rule of having all your accounts at one institution. Some of these bigger banks or even credit unions are not going to give you a great interest rate. That’s not beneficial if you can get a better rate elsewhere.

We live in the age of financial technology. We've got a lot of options available to us online, including high yield savings accounts. These are basically savings accounts that are going to pay a better interest rate.

As of recording, they pay around 4%. How can they do that? They're leaner in their operations. They don't have to pay for the brick-and-mortar buildings and they have a more limited staff than traditional banks. Usually, high yield savings accounts have no fees and no minimums. With the high interest rates, it’s more money that you get to keep and it’s still easily accessible.

You're going to need to have some money in savings as a rainy-day fund or emergency fund. This is for unexpected expenses that might come up like a car breaking down or hospital bills. Having money that's sitting on the sidelines, not being invested for the long-term, but still making some sort of return is nice.

For the very first time in 10 years, we’re having clients tell us they put money into a certificate of deposit (CD). CDs are great if you need to get some money into a locked interest rate. That's the benefit of CDs compared to a high yield savings account. You have a guaranteed interest rate, but the money is not easily accessible. There are penalties if you withdraw the money early. A lot of times, CDs will auto-renew. So, if you are not paying attention to the end of the term, the money will be locked in again at a new interest rate.

Ultimately, if you have enough money in a high yield savings for your emergency fund and you’ve built up what you need for a short-term goal in cash, there are better places to put that money than a CD. There are more efficient uses of your liquid capital at a certain point in time.

When thinking about de-stressing a doctor’s life, automating savings can play a huge role. You can set up these high yield savings accounts with automatic drafts every paycheck or every month. Then you won't even have to think about it. One of the main challenges where people struggle to save is that they think they have to do it consciously; believing they must take money from their paycheck and move it manually from their checking to their savings accounts. We find that if you have your savings automated, at least as you're building up that emergency fund or that short-term goal. It just happens on autopilot. You don't see the money, you don't spend it, and you don’t even miss it. It's much like a 401K at work where your money goes straight from your paycheck to your retirement account. This method limits overspending and meets your goals on autopilot.

What's an appropriate amount of cash do you have on hand? The rule of thumb has always been three to six months of fixed expenses. For a lot of our doctors with the higher salaries, it's probably more like 3 months of fixed expenses you need to keep on hand.

However, some doctors feel more comfortable having a larger cash sum. We want you to have enough cash that you're going to be able to sleep at night and not worry about your accounts.

If you have a short-term goal, say you're buying a house or something's coming up within the next year, that's where the additional cash would come into play. But really, you run into a risk if you have too much cash. You’ll start losing the value of that money over time due to inflation. We've all experienced inflation recently at high levels. It hurts when you see that money lose value year after year. And that's what happens if you put too much in your savings with low to no interest.

Tip #3: Budget Hacking

This is something I think is incredibly beneficial. A lot of doctors tell me they’ve been bad with their budget; they haven't looked at the numbers in a while. Sometimes you don't have the time or desire to dive into a spreadsheet and look at every single line item. I don't think that's realistic for a lot of people.

Budget hacking is done by calculating the date for automatic drafts for fixed expenses to make your spending easier.

Say you have $15,000 of fixed expenses each month. You’d make sure that your bills are set up to pay roughly $7,500 on the front end of the month and $7,500 in the middle of the month, assuming you're paid twice a month.

If you’re getting paid on the 1st, on the 3rd or the 4th, $7,500 is going to come out of your account for expenses. Now you're left with more money in that account from your paycheck for variable spending money. You can spend that money freely knowing that all your savings, your utility bills, your mortgage payments have been deducted. The same thing happens again around the 18th of the month.

Really, all you need to track from a budgetary standpoint is what these variable expenditures look like in that time period and if there are any behavioral changes you need to make to avoid spending too much.

The whole key to making this work is paying yourself first. Make sure that part of those fixed expenses is money transferring to your savings and investment accounts.

The next stage is funding your Roth IRA and brokerage accounts. Whether you are direct funding your Roth IRA or funding your Roth IRA via the backdoor Roth conversion strategy, make sure you talk to your tax professional to avoid any unexpected tax bills.

These should be set up like your savings account, where money is automatically moved from your checking account each month. That way you have the peace of mind that your wealth is being built without you even having to think about it and now you can spend the rest of that money without guilt.

Tip #4 Insurance

Last year, there was a lot of news about banks going under and banks closing. People were very worried about losing money in banks and some people did lose money.

We touched on this earlier, but the FDIC and NCUA are what keep your money safe in banks and credit unions. But there are limits on this. The FDIC and NCUA cover up to $250,000 worth of deposits for an individually held account. They cover up to $250,000 for each co-owner in a jointly held account. If you need more money at a bank or credit union than this, you could open another account at another institution.

Tip #5 Payable on Death Accounts

The last tip I want to talk about is doing something called a Payable on Death (POD) account. You might have heard of Transfer on Death (TOD) accounts. Those are for brokerage accounts while PODs are for bank accounts.

We recommend when you're reviewing your bank accounts, making sure you got them set up with a POD designation on each of your accounts. It's essentially a beneficiary designation. If you have an individual account that you want to go to your spouse if you die, it's going to transfer to them without issues. As long as you have the POD set, there's not going to be questions asked. You could list individuals or trusts as PODs.

If you have two people listed as payable on death recipients, you actually up your FDIC limit. If you have a joint account, you have a $500,000 FDIC coverage limit. If you list the POD as two people, maybe your children, the coverage limit bumps up to $100,000,000.

If you do not list a POD on your accounts, the money goes through a probate process where the government's figuring out what to do with your funds. It could take months or sometimes even years before your family could access the funds. And then it’s up to the government to decide who gets the money, which might not be who you would choose.

Conclusion

Be mindful about your bank accounts. Using these tips can make setting up and using your bank accounts easier and hopefully a whole lot less stressful. It can reduce conflict between spouses. You can put your savings and wealth building on autopilot. And hopefully you can get some extra insurance on your accounts and get you some extra returns.

Sources:

FDIC Regulations: https://www.fdic.gov/resources/deposit-insurance/brochures/insured-deposits
NCUA Regulations: https://ncua.gov/consumers/share-insurance-coverage

Listen on Apple Podcast, Amazon Music, or Spotify.

1-888-256-6855

Remember that you can send us any questions at: Info@MDFinancialAdvisors.com

Katherine Vessenes, JD, CFP®, is the founder and CEO of MD Financial Advisors who serve 600 doctors from Hawaii to New York. An experienced Financial Advisor, Attorney, Certified Financial Planner®, author and speaker, she is devoted to bringing ethical advice to physicians and dentists. She can be reached at Katherine@mdfinancialadvisors.com.

Ben Kirchner, AAMS© / Financial Advisor
After starting his career at two Fortune 100 companies, Ben joined MD Financial in May of 2018. Ben advises over a hundred doctor households, helping them achieve their financial goals. He is passionate about serving. Ben enjoys making sure all of our doctors thrive financially and have a great experience every step of the way. He can be reached at Ben@mdfinancialadvisors.com.