What is the ideal account setup? How does one structure their accounts for success? For the former the answer is simple, as many as you need. For the latter, that's a bit more subjective. Here I will explain how I set things up and why and you can make your own judgement call from there. Regarding number of accounts, most people have two, a checking and a savings account. In terms of what is needed for receiving, spending and saving money this setup does serve that purpose, but it could server that purpose better.
Let's assume that today is the 18th of the month and that you have a checking account with a monthly direct deposit. On the first day of the month $1,000 dollars was put into this account. $500 of that was withdrawn from this same account for rent on the third. You spent $200 on groceries on the 17th so you are already down to $300. Now, Netflix and YouTube TV were withdrawn on the 10th for $45, Adobe Creative Suite will be deducted on the 20th for $55 and your gym membership will be deducted on the 25th for $49.50.
You are out on an anniversary date with your significant other, a nice restaurant with a 7 course dinner sampler & wine pairing for $90 dollars a person. (yeah, I wouldn't actually do this either, but just roll with the example...) You check your account and see you have $255, everything looks good so you and your S.O. enjoy a nice dinner. Everything is good right? ...Not quite. Were you tracking everything that happened? If not that's ok. I'm not great at word problems either. lets look at the same information above in a spreadsheet format:
Do you see what happened there? The day you went out dinner you did have more than enough to cover the dinner, (which... side note: please don't spend that much per person on a dinner. I promise you no food on this planet is that good) but, Argh!! You forgot about a couple of bills that still needed to be deducted! Many of you may have experienced a situation like this once or twice. It happens, but with the ideal account setup, it doesn't have to.
Before I start getting deep into this, I want to dispel a myth in regards to checking and savings accounts. This is that opening many checking and saving accounts will hurt your credit. This is not true, you can have as many savings and checking accounts as you like. There is no sort of penalty for having multiple accounts.
The one thing you should be mindful of when opening accounts is that some banks, like for example Charles Schwab, will run a hard check on your credit before they will open an account. Running a hard credit check can affect your credit score. (See The Difference Between Hard and Soft Credit Checks) The only thing to be mindful of are any bank requirements like minimum balance requirements, direct deposit requirements and any related fees. Ideally if you are going to create multiple accounts, you'll want to chose financial institutions that do not have fees or requirements for their accounts. Ok, with that out of the way, lets continue...
So what would be the ideal account setup? An ideal setup would be one in which one account receives all income, and from which all incoming money is then re-allocated (aka, your primary checking). This basically means the money that goes into this account does not stay there. It either goes to a bill or is transferred to another account and that's it. This account is like a central transit hub, everything goes there but nothing stays there.
You should have a savings account in which you keep 6 months worth of living expenses. (why? Because apparently everyone says so.) Realistically I don't think you need 6 months worth. The point is to have enough that if you hit real trouble, you'd be set for a long time. How much you should have in this account is based on how confident you are in how long it will take you to find another job should you lose it, even if the economy is doing poorly. Then add a month or two buffer to it. This account will be your emergency fund account.
If you don't have enough to cover 6 months of expenses, that's fine, the important part is setting up an emergency account and then flowing some money towards it. Even if you can only flow $5 a month toward such an account, it's worth it. For a truly ideal account setup, I highly recommend a high yield interest account for this. I personally have a Marcus account for this purpose.
You may be wondering at this point that if all the money in your checking account is being redirected elsewhere so that it can't be spent, how do you buy other things like your morning coffee and bagel before work? How is that an ideal account setup?! Well, glad you asked. One of the places your money should be redirected to is a checking account meant for general spending. The idea being that the money in this account is money that you can use to buy anything. This is your "fun" money account. It's the money you can spend completely guilt free because you know it's not needed for or tied to anything else.
Once your fun money account is established, you should set up savings accounts for any other longer term items you may need money for. An example account I would recommend you create is one for gifts. Every year someones birthday always seems to sneak up on me at the most inconvenient financial time. How much simpler life would be (and now is) if I had a saving account where I put some money in each month specifically to cover the purchase of gifts for all the birthdays in a year!
Ok, that was a lot of information. Let's review and simplify how accounts can be handled to avoid the scenario of spending money you don't actually have.
If you're curious how I personally have setup my accounts, I will write about it at a later time. So that's about it! This may seem like a lot of work and the initial setup can be. When it's done, the amount you have in your spend account is exactly the amount you have to spend. When you need to buy gifts, the money sitting in your gift account is exactly what you have. What you see is what you get. There is no need to wonder if you paid all your bills yet or if there was something you forgot about.