No holes in my bucket - The HYSA and/or Investment Account
I recently spent a moment reflecting on what it means to me to consistently spend less than my income. I reflected on the fact that in my childhood, I often felt “broke.” My mind replays these experiences I’d have where a group of us were going to the pizza shop after school and I didn’t have enough money for a slice. This occurred when I was in elementary, junior high and high school. When I was younger, my parents gave me an allowance and when I was in high school I had an after-school job. I don’t remember it occurring to me that I mine was more of a “spending problem,” than an “income problem.” I can think of several reasons why it might not have occurred to me, but I’ll save that analysis for my therapist. But I will share here that this anecdote helps a smidge to articulate what it means to me to consistently spend less than my income. Let me put it this way:
A while ago, I had an epiphany. If you consistently spend less than your income, you WILL accumulate wealth. It is inevitable! Conversely, if you consistently spend more than your income, you WILL deplete wealth. Also inevitable! I don’t eat much pizza these days, but I DO cherish the ability to make purchases that I value. I DO appreciate the opportunity to dream of things that might seem unobtainable and to work (even slowly) toward the realization of those dreams. More practically, I DEEPLY DO appreciate the ability to meet my financial obligations and avoid the discomfort that comes with a failure to do so.
For the reasons above, I believe that all adults should strive to consistently spend less than our income!
If we do consistently spend less than our income, we WILL accumulate wealth. As such, I believe that once someone determines that they will spend less than their income, they should “immediately acquire a bucket,” to collect said wealth. A figurative bucket! Here is what the literal bucket looks like:
High Yield Savings Account (HYSA)
When we deposit money in the bank, we are lending money to the bank. We must demand compensation for the loan. As such, I recommend that you have two different types of bank accounts: Operating Accounts and High-Yield Savings Accounts.
Operating accounts are money-in money-out accounts. They are the accounts where you likely deposit your income and from which you fund your expenses. They are checking accounts and generally pay you minimal interest. I highly recommend keeping some kind of cushion in the operating account, so that you don’t risk making a transaction for which there are insufficient funds. You can read more about this cushion concept by clicking here.
An High Yield Savings Account (HYSA) is simply a savings account that pays a much higher interest rate than a traditional savings account. A traditional savings account might pay one-third of one percent (0.33%), while an HYSA might currently pay three to four-and-a-half percent (3.0 - 4.5%).
High-Yield Savings Accounts are where most funds held by banks should accumulate. I tend to categorize my High Yield Savings Accounts two ways: “Reserve” Accounts and “Wealth” Accounts
The reserve accounts house all funds that are being saved up for some purpose. These are not funds that will accumulate in the long run. If I’m planning for a vacation, a bill I pay only once per year (like property insurance), or expenses that occur “when they occur,” like auto repairs, home repairs and the “it happens fund,” I accumulate these funds in a high-yield savings account. Let’s use auto repairs for example. There are some months where the car is “quiet” and doesn’t demand money. If I save $500 over those several months for auto-repair, it is responsible to earn interest on that $500. You can read more about reserve accounts by clicking here.
Now for a controversial statement: Saving for a rainy day (which is done through these “reserves,”) is not accumulating wealth. Consider the following example:
In January, I saved $300 for a rainy day
In February, I saved $300 for a rainy day
In March, I saved $300 for a rainy day
In April, it rained and I spent $900
In this example, I have behaved extremely responsibly. I will likely feel peace if I experience what was described in this example. This behavior is healthy and will likely benefit me. I am NOT in any way shape or form downplaying the value of this behavior. I whole-heartedly believe in it, which is why I keep referring you to an early post, which you can access by clicking here.
However, in the example above, you are not consistently spending less than your income. You are simply making sure that the periodic nature of expenses don’t cause you to spend more than your income. But when you consistently spend less than your income, you will accumulate wealth, so you should have AT LEAST ONE separate account in which to accumulate that wealth. The first of those accounts should be an HYSA. This is the one that I call a “wealth account.” Let’s beef up the earlier example to demonstrate:
In January, I earned $2,400, reserved $300(in my “Reserve” HYSA), spent $2,050 and deposited $50 in my “Wealth” HYSA
In February, I earned $2,400, reserved $300, spent $2,100 and deposited $0 in my Wealth HYSA
In March, I earned $2,400, reserved $300, spent $2,000 and deposited $100 in my Wealth HYSA
Because, in this example I have spent less than my income in January, February and March, I accumulated wealth and I have appropriately stored that wealth some place that meets two criteria:
Clarity: Because it is my “wealth” HYSA, it is a clear indication of my history of spending less than my income
Earning potential: Because it is an HYSA, the “loan I am making to the bank” by depositing my wealth there is earning additional money for me
Your HYSA should meet the following criteria:
FDIC Insured
Reputable Bank
No monthly service fee
No minimum balance requirement
Easy immediate access to your funds
Investment Account (IA)
The second kind of account appropriate for wealth accumulation is an investment account. Let me start by saying that wellbeingGrant is NOT a registered investment advisor and those of us who invest do so at our own risk. From my perspective, the main purpose of investing is so that our wealth is not destroyed by inflation. If you are buying a home, taking a vacation, buying food, buying a car or gas for said car, you can see the impact of inflation. Each of these purchases costs more than they did a year ago. Investing gives our money an “opportunity” (not a guarantee) to grow faster than inflation or keep up with inflation.
In the example above, I saved $150 of wealth in my “wealth HYSA.” However, I can also consider saving $75 in my “wealth HYSA” and $75 in an investment account.
There is a book that I read a couple of years ago, which I really enjoyed, called “The Psychology of Money,” by Morgan Housel. The last chapter of the book is called “Confessions” and he shares specifically how he and his wife manager their money. I’ll include a few excerpts below:
“every stock we own is a low-cost index fund.”
“My investing strategy doesn’t rely on picking the right sector, or timing the next recession. It relies on a high savings rate, patience, and optimism that the global economy will create value over the next several decades. I spend virtually all of my investing effort thinking about those three things - especially the first two, which I can control. I’ve changed my investment strategy in the past. So of course there’s a chance I’ll change it in the future.”
I love these excerpts because they are simple, don’t purport to know everything or predict the future. My investment strategy (excluding real estate) is somewhere between similar and identical to the one Housel describes. As such, my investment account meets the following criteria:
Low cost
Reputable Financial Services firm
Options for Roth IRA, which allow me to put after-tax money in but generate untaxable investment returns
My Wealth HYSA and my Investment Account combine to form my “bucket.” This bucket does not have holes in it. I don’t willy-nilly withdraw funds. Ideally, emergencies are funded from my reserve account.
My Wealth Philosophy
For many years, when my wife and I have withdrawn funds from our “bucket,” we’ve called it “using our wealth.” One impact of speaking this way is that it helps us to think very carefully about the value of the potential purchase/investment. One of the benefits of accumulating some wealth is that it can help prepare you for investment opportunities. We have been able to make investments with our wealth, which is not “spending,” but “investing.” We have also used wealth to fund education, life-enhancing once-in-a-lifetime experiences and to contribute to the wellbeing of our community.
Since “you can’t take it with you,” when physical life ends, I’m not an advocate for wealth accumulation for its own sake. For me, wealth accumulation represents my ability to manage my financial behavior in a way that best aligns my intentions with my values. When we “use our wealth,” we do so in ways that may reduce financial wealth, but that accumulate life-wealth. I strive not to be “broke,” because my experience with broke-ness wasn’t peaceful whether it was when I was a teenager who often hoped one of my friends would buy me a slice a pizza (they often did) or when I was a young father and husband and the needs of the household were not met.
The wealth that we accumulate, big or small enables us to be financially-intentional. Being financially-intentional is not only peaceful, it feels amazing!
One Final Note on Scale
In case it’s not obvious, I want to state clearly that accumulating wealth by consistently spending less than our income is highly rewarding regardless of the scale at which you accumulate. If you habitually spend $10 less than your income for a year and accumulate $120, you will likely be thrilled. Many of us struggle to consistently spend less than our income, and the stress of behaving that way ranges from low-grade to intense. Consistently spend less than our income feels amazing! So I encourage you to make spending less than your income a habit. By doing so, you will inevitably create wealth.
Don’t forget to acquire a bucket,
wellbeingGrant