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What Does “Layering” Your Bank Accounts Mean?

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When it comes to the basic building blocks for financial success, how you utilize bank products, like checking and savings, is critical. We prefer a method called “layering”, which means using various products, like checking and savings accounts, for different purposes. This strategy goes hand-in-hand with our belief that every dollar counts!

The checking account: 30 days of funds

  • Primary Purpose: Checking accounts enable financial transactions, which is important for the day-to-day costs of life. Store enough money in checking accounts to pay immediate expenses, like those that occur each month. With checking accounts, you’re allowed numerous withdrawals and unlimited deposits. The tradeoff for having an account where cash is available at a moment’s notice is usually a much lower (or even non-existent) interest rate.Action Item: Determine what your 30-day cash needs are and limit the available cash in your checking account to this amount. Also consider setting up a link to another account. Most banks allow this so you do not have overdraft fees. Consider looking for a checking account that provides an automatic sweep function of excess funds into a higher-interest savings account.

Basic savings account: 2 to 3 months of funds

  • Primary Purpose: To store your money in a secure location so you can use it to pay periodic expenses that are expected over the next 2 to 3 months. While these accounts typically pay only a modest amount of interest, their safety and reliability make savings accounts a great choice for stashing cash you want available in the very near future, but that shouldn’t be spent on everyday items. This is often your overdraft buffer in case your checking account gets overdrawn.Action Item: Calculate your anticipated periodic expenses over the next 2-3 months, and limit the cash in your savings account to this amount. You don’t want the balances too high, as you can typically get better interest in other bank products.

Higher-yielding savings accounts: Longer than 3 months

  • Primary Purpose: There are several types of bank accounts for storing your money beyond what you need for short-term expenses. High-yield savings accounts, money market accounts, and certificates of deposit (CD’s) all provide at least 10x the interest return compared to a regular savings account. But in return for a higher interest rate, there are rules that govern how long you need to leave your money untouched in these accounts. Each type of account is different, so make sure you’re matching your needs to the accounts.Action Item: Review your bank’s alternatives for longer-term savings. Pay attention to interest rates and how often they adjust with the market. If CD’s are your bank’s strength, consider building a ladder of expiration dates to make your money more available. On high-yield accounts, the interest rate often increases with higher balances, so know what products these are. It’s also a good idea to talk to your banker to review your options.

If you have additional money that you don’t anticipate needing in more than a year, keeping it in a bank account or savings account might not be the best option. You may wish to consider other investment options that provide the potential for better long-term returns. Please be in touch if we can help you figure out how to best manage your liquid reserves and plan for your financial future.

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