BANKING STRUCTURE - Tony King

Welcome to personal financial strategy,..... the podcast

a podcast wholly devoted to you and your money bringing expertise to bear on how you earn, invest, and spend your hard-earned cash.

A brief review for strategists just joining us, ….

In episode one we defined a personal financial strategy in episode 2 we discuss an essential tool called the cash flow map.

In episode three we talked about how the cash flow map is used to determine a cash flow plan. 

The tools we are handing out here, build one upon the other if you missed episodes 1, 2 or 3 we recommend listening to those before proceeding to this episode.

Today,..I would like to introduce you to a concept that will add a ton of value to your PFS.

The employment of a proper banking structure.

Most people employ a banking structure that consists of a checking account and a savings account.

I think we fell into this natural ... when we first started working,  we were told we needed a checking account to send our paycheck to,..and to use this account to pay our bills,...fair enough. 

So we ran down to the local bank and we opened a checking account .. the nice banker there offered to open a savings account as well and we have been operating on this two account system ever since transferring money back and forth as we try and pay all of our bills on time and save some money.

I probably don't need to go into how inefficient this is from a cash flow standpoint. Essentially it is cash without the “flow” piece added !

I propose a banking structure that I think puts the flow to cash here we go.

This is going to be a little bit difficult to do without visual representation but I will do my best to describe it so you can picture it in your mind.

1st - a proper banking structure answers a few questions:

• How many bank accounts do I need?
• What type of bank accounts do I need?
• and how can I make these accounts work together to optimize my cash flow?

What I will describe next is what we consider a minimal banking structure.

At bare minimum everyone needs:

• 1 brokerage account
• 2 checking accounts
• 1 Savings account

Using these four accounts let's give them each their proper assignments:

First the Brokerage account 

Everyone should have a flexible brokerage account at one of the large brokerage houses; Schwab, Fidelity Vanguard, etc. 

This account should have the ability to pay for what I will call “Frontline Investments",... Purchase of stocks, bonds, index, and mutual funds as well as the ability to transfer money to our checking and savings accounts which in all likelihood will be outside of the brokerage house.

For example, I use Charles Schwab, the account I have at Schwab can fund Stock purchases as well as transfer money to an outside bank … I use Midfirst Bank for checking and savings accounts and transferring cash between my primary brokerage account and my outside bank accounts are seamless.

The first assignment given to the brokerage account is to accept our monthly income from all sources. whether it be salary $ wages/ earned interest / or paid dividends  …. all income should be ported to your brokerage account.

Why? 3 reasons

1. Small Interest 
2. Frontline Investment contributions can be easily made and scheduled from a Brokerage Account
3. Simple / Scheduled funds transfer to my neighborhood bank

Moving on,.. 

Billing Checking Account or account #2 - the assignment for this account is:

Paying our monthly bills! Using the bill pay feature, take the monthly bills identified in column two of our cash flow plan (refer to episode3,.... apologies but episodes 2 and 3 are building blocks and this, optimized banking structure is very dependent on having a cash flow map & plan,.. If you haven’t listened to episodes 2 and 3 ,.stop now and listen,.. They are brief and essential,..OK let’s move to the next acct).

OOP Spending Checking account or account #3 - the assignment for this account is:

This account's main feature is debit cards … everybody in the family who is spending out-of-pocket cash should have a debit card attached to this account.  

This account pays for all of the spending's we identified in column three of our cash flow plan. All Monthly out-of-pocket spending is conducted using these debit cards, the reasons are pretty obvious …  Each transaction will have an electronic record which is easily tracked and categorized.

Savings Account or Account #4 - the assignment for this account is:

The primary purpose of this account is to house accrued cash toward your specific funds. 

Example: In making your cash flow plan you determined that you would take a vacation 12 months from today that would cost $3600. In your brokerage account, you would schedule a $300 cash transfer on the 15th of each month to this savings account. When vacation time rolls around next year, you know exactly where to go for the money to pay for it in full,.. no credit needed. 

This savings account is a short-term savings account, a place to park money, short-term for future purchases, a new car, a big-screen TV, vacation, new furniture,   …  things like that.

This account is optional,.. If you have more discipline than I do,.. You can let this cash accrue in your Brokerage account until you make a purchase. Personally .. I like to watch the savings account total build overtime,...this adds to my anticipation of making purchases, it also contributes to my peace of mind as I watch the number grow ,...It feels like I am stepping toward the goals I made in the cash flow plan.

Remember Your banking structure works in tandem with your cash flow plan, funding your lifestyle at the pace of your choosing.

Let's talk for just a second about how these two concepts work together.

Done Properly, your cash flow plan is a detailed guide to how you will reach all of your financial goals so let's refer back to the plan and reference our assignments for our banking structure.

This is the fun part,.. TELL YOUR MONEY WHERE TO GO ...AND WHEN TO GO!

Once you have prescribed all of your income to flow into your brokerage account you can then go into the brokerage account and give assignments for each of the following three accounts.

for account number 2 the billing account

Reference your cash flow plan which gives you the monthly total needed to pay all of your monthly bills, Take that total and multiply it by .51, then schedule your brokerage account to cash transfer on the 1st and the 15th of each month. This amount. 

Example simplified for podcast purposes”

Cash Flow Plan says we have monthly bills that total $1000, .51 of $1000 = $510, In the Brokerage account I set up scheduled transfers on the 1st and the 15th of each month of $510, total transferred = $1020 more than enough to cover the monthly bills.

You may discover that you pay more monthly bills in the first half of the month. If that is the case you would change how much is transferred on the 1st transferring more on the 1st and less on the 15th I hope that makes sense?

It might take 2 - 3 months to figure out the monthly “demand” of your Bill Pay account but that is ok,.. As long as you stick to the “Plan” … in our example,..no more than $1020 goes into the account each month.

Once you get this set,.. It is just like the infomercial says “Set it and forget it” unless one of your monthly bills changes you never think about these bills again.

For account number 3 the out of pocket expense account

Again going back to the cash flow plan you will have a monthly total but a small change is recommended here. We recommend transfers on the 1st and 15th of the month -  53% of the monthly total.

It is easier to program this account to meet your plan because out of pocket spending happens throughout the month and typically is not loaded on one end of the month or the other however we recommend monitoring this for the first three months you may be able to reduce the twice monthly deposits If you find that @ the end of the month you have significant cash building in this account.

For account number 4  - the savings account

As discussed earlier this account is actually optional but if you put it to use ... just make sure that all of your monthly “funding of funds” hits this account on prescribed dates. 

Personally I like the visual this account represents. It's always there saying keep going you're on the right track!

OK I have to be honest … describing the banking structure with words difficult if this was as clear as mud to you please go to our website at www.personalfinancialstrategy.com and click on the resources Tab,  there you will find a graphic depiction of a proper banking structure

Key Takeaways:

1. Invest time in forming your cash flow plan,..its critical
2. Combining a CFP with proper banking structure allows you to automate your financial life
3. Using a brokerage account to house your cash,  leverages modern banking technology to add structure to your:

• frontline investing 
• bill paying 
• out of pocket spending 
• & saving for future purchases 

They say “a picture is worth a thousand words,.. Visit the website www.personalfinancialstrategy.com and get your Cash Flow Mapping Tool and take a look at our recommended banking structures.

 

Until next time. 

Keep strategizing