The 3 cash accounts you need to build wealth
As a financial freedom coach, I always ask clients what their goals are before we start working together. I’ll often hear things like “I want to get out of debt,” or “I need to become financially independent from my parents.” But one of the most common words I hear from my clients is “savings.” Everybody wants to build their savings, but few know how — or where — to start.
Some clients tell me the exact amount they want to have in their savings, but most have no idea how much they want (or need). They just want “savings” describing it like some kind of abstract concept. The problem with not having a savings goal is that savings, by itself, has no real value. The value comes from knowing what you're saving for.
As a society, we value things. We value experiences. We like instant gratification and numbing our feelings with distractions. But we often don't appreciate the physical thing itself. How often have you lost cash because you misplaced it or found out you've been paying for a subscription you don’t use?
(Raises hand.)
Every dollar you have, earn, inherit, save or spend should feel valuable because each dollar is working toward something: some kind of end goal or result. The key is to understand that saving money is much more than just, well, saving. It’s building wealth.
Here, we’ll break down the three most crucial cash accounts you should have in order to grow your savings and build wealth. Notice I say cash accounts — not savings accounts. Cash accounts are only one form of savings. There are other savings instruments that aren't liquid, meaning you can’t access them immediately. In many cases, if you take from them, there is a fee, penalty or tax requirement attached. This article will focus on cash accounts because they are your bedrock for building wealth.
The first line of defense
I tell my clients to always try to have enough in their everyday checking account to cover one month of expenses. When we get started, the majority of their checking accounts look like a forgotten drawer of spare change, foreign currency and paper clips. There’s no purpose, no intention and lots of avoidance. And while many of my clients seem like they’re functioning just fine with $30 in their checking account, their unconscious mind is in overdrive, fearing for their survival every time they swipe their debit card.
A low balance in your checking account can have a chronic effect on your mental health. Here are some examples I’ve seen with clients:
Anxiety about feeling safe and secure
Depression because seeing $0 makes you feel like a zero
An overall lack of confidence.
Building wealth isn't just about having wealth — it's the mindset shift that you are abundant. By having a month’s worth of expenses in your checking account, you're proving you can keep money without spending it. You’re acknowledging that you respect and honor why the money is there and that you're capable of not abusing it. Most importantly, it's your first line of defense if you’re hit with an unexpected expense or event.
Emergency fund
Once your checking account has a month’s worth of cash in it, you’re able to start an emergency fund.
Emergency funds are the ultimate confidence builder. They make you feel safe, secure and in control. They allow you to quit a job you hate, take off work to care for a sick parent or simply not worry about how much the emergency vet bill will be when your dog eats something she shouldn’t off the street.
(Raises hand.)
Now, the amount of money you should keep in an emergency fund will likely depend on what kind of work you do. If you’re a traditional worker, you would ideally have a six-month emergency fund, which means six months’ worth of expenses.
A “traditional worker” is someone who has a job that provides health insurance, 401k benefits, disabilities and life insurances, paid time off (PTO) and consistent income monthly. The reason why someone in this position doesn’t necessarily need a huge emergency fund is that you have access to disability insurance, PTO, job stability and potential sabbatical or maternity/paternity leave.
If you’re a gig worker or independent contractor, you should have about eight months to a year’s worth of expenses in an emergency fund because your work is probably more variable and you want to feel safe and secure during low-income months. Having a robust emergency fund also allows you to be pickier about which jobs or clients you take on.
I always encourage people to use high-interest savings accounts (HISA) or money market accounts (MMA) for emergency funds. A traditional savings account usually has a .01% growth rate, and frankly, there are just better options out there that are free. My personal favorite HISA is the one offered by Alliant Credit Union. It’s easy to open and allows you to grow your money at a 0.55% return with no fees, which means you’ll make a little money each month just for having money in your account.
A MMA has similar returns and acts like a traditional checking account. The main difference between an MMA and a HISA is the MMA comes with checkbooks. HISAs do not.
It can take a while to build up an emergency fund. But every single dollar matters. Even if you can only contribute $25 to your account today, consistency and focus are critical to long-term wealth.
Short-term savings account
This is typically known as a sinking fund, but I’ve always felt more empowered calling it “short-term savings.” So what goes into this fund? Money intended for weddings, travel, surgeries, vet visits or other high-ticket items or events. Imagine going on vacation where you don't have to stress about blowing your budget. Imagine attending every wedding this year without scrambling to find the cheapest accommodations for a holiday weekend.
For independent contractors and gig workers, a benefit of having a short-term savings account is using it to pay yourself. Say you work as a book editor, and you get contracted and paid in January and will not get paid again until April. By understanding your expenses between January through April, you can deposit that money all at once into your short-term account and pay yourself a monthly salary until your next payday. If the bulk payment isn’t enough to cover four months, then you know you have to find more work. Once you’ve determined your cash flow, anything extra can go into your different savings buckets — like your emergency fund, checking account, retirement fund or future home/car fund.
Short-term savings accounts can be set up directly through your regular bank or the bank you use for your emergency fund. It’s important to confirm that your bank doesn’t charge you a fee for this service. My favorite short-term savings account is Alliant Credit Union’s checking account because it pays a 0.3% interest rate. Most banks offer the ability to add different accounts; you just want to make sure you aren’t being charged. Do a little research to find accounts that earn interest.
Why shouldn’t you just put that money into an emergency fund? There are a few reasons.
Compartmentalizing your money allows you to break out your goals into bite-size pieces. It's easier to wrap your head around saving $50 a month to save $450 for a wedding nine months away than working toward having $48,000 in your emergency fund. They are not the same thing, so they shouldn't be in the same place.
Taking out money from your emergency fund can trigger feelings of failure. Organizing your different funds reminds you what the money is for without having to worry about affecting the funds that are in your other saving or investment buckets. Financial freedom is feeling confident about and in control of your finances.
Your emergency fund shouldn't be funding your extracurriculars. What happens if you lose your job, get sick or need to step away from work? You'll quickly blow your emergency money on vacations and other weddings, and you'll have to start from square one to rebuild your emergency fund.
Adding intention to your savings can take the pressure of “getting there” and allow you to feel good about your progress. Cash accounts make you feel safe, secure and in control.
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