29 comments

Instant Wealth Boost by Tidying up your Bank Accounts

Being Mr. Money Mustache comes with certain privileges and responsibilities. One of those is helping individuals with their problems, as with this funny situation that happened at MMM headquarters last week.

A reader who happens to live in Colorado set up an appointment to meet with me to review her own finances in detail and see if I could help. This person is highly intelligent and also earns a solid income, so I figured she would probably already have everything set up pretty optimally.

But in a bit of good luck for both of us, I was quite wrong. And the experience opened my eyes to a situation that might be quite common out there in the increasingly complicated world of personal finance. I got her permission to write about the situation, (with a few details changed to protect privacy). Check out this amazing story to see if any of it echoes in your own life.

The friend had recently run into a bunch of expenses – home repair, tax bill, car dying and being replaced with a newer used car.

When you add it all up, there were new debts of about $47,000, distributed across three different loans like this:
- $8000 on a credit card at 13%
- $20,000 on a personal line of credit at 10%
-$13,000 on a car loan at 7%.
Total monthly payments: about $327 of interest, plus a few hundred in principal, making a total load of $650. When you add in a home mortgage, it all sounds pretty bleak, right?

But then we reviewed the rest of the financial accounts. There were a lot of them. They included:

- 4 different savings and checking accounts, some of them left over from before she got married, with an average of about $1000 kicking around in each.
- A home equity line of credit with $10000 in available credit at about 6%
- Several old investment accounts left over from previous employers’ stock purchase plans, etc. (regular taxable accounts, not 401(k)s) with a balance of $20,000 that hadn’t been touched in 10 years!
- Yet another family account with $10,000 available earning no interest.

To make a long story short, the assets that were sitting around were more than enough to cover all of the high-interest debt! We decided she would close ALL the old accounts and consolidate everything (salary direct deposit, automatic bill-pays, etc.) into just one clean and tidy checking account. This would free up those few thousand from the mostly-unused checking accounts and make life simpler to manage as well.

Then she would rake together the money from everywhere else to pay off ALL of these debts – even the car loan.

Now the friend will have NO credit card payments, NO personal line of credit, NO car payments, and will be back to just paying a conservative mortgage payment. With the extra monthly cashflow, she can start making extra payments on the mortgage and bringing the line of credit down as well to increase her cash cushion.

These results are not typical, but a similar situation IS typical. Many people (including me) sometimes hang on to multiple checking or investment accounts just for sentimental purposes, without thinking of the cost – even when there are outstanding debts that could save you big bucks if you just transfer your own money from one place to another.

Mrs. M and I were motivated enough by this experience to do some cleaning up of our own. We sold off some of our own non-retirement index fund savings (in Vanguard) to finally wipe out the rest of the home mortgage I’ve been procrastinating on for the past few years. There is always the possibility that the US stock market will go up even more and I’ll miss out on those gains, but it is already near record levels, and it is just good strategy to be fully out of debt. Especially with the Mr. Money Mustache philosophy of maximizing the Good Life by minimizing stress even while you Amass a Stash of Cash.

If you have debt with an interest rate higher than what you are getting in savings, you might enjoy a bit of moneymaking simplification like this as well. If you have specific questions or situations to share, send ‘em in! If you like, we can even make an inspirational story out of YOU.

 

  • Mr. Frugal Toque May 4, 2011, 10:36 am

    Never mind the costs of having multiple bank accounts.

    http://memory-alpha.org/wiki/File:Riker_straw.jpg

    Just like having a straw jammed in to the side of your head, your bank will find ways to slowly vacuum away your money with every account you have open.
    We used to have an account that had a clever, delayed way of charging us fifty cents every time we “updated the passbook” with the bank’s dot matrix printer.

    Reply
    • MMM May 4, 2011, 11:32 pm

      Niice. I appreciate the contribution of the sucking and/or violent metaphor – definitely the type of thing we like to use here at Mr. Money Mustache to make personal finance more dangerous and exciting.

      Reply
    • Daniel March 20, 2012, 6:54 am

      I have two credit union accounts and a bank account (each has a specific purpose) and they don’t charge me a dime in fees. If they ever did, I’d close my account and move on.

      Reply
  • El Beardo Numero Uno May 4, 2011, 11:03 am

    Congratulations on paying off your mortgage! And, nice work helping your friend consolidate her finances. I can only imagine her mental image of her financial situation before and after. She must really feel in charge of her situation now. Well done!

    Still working up to having “the talk” with Ms. Beardita…

    Reply
    • MMM May 4, 2011, 11:34 pm

      Thanks Beardo! I would quite enjoy hearing more of your own tales as they develop, too. We need more reader stories around here.

      MMM

      Reply
  • Bakari Kafele June 2, 2011, 7:45 pm

    This reminds me of an instructor I once had.

    He had some tens of thousands of dollars in various bank and investment accounts, and at the same time a few thousand on a credit card (from buying expensive toys like jet skis and ATVs) and an upside down mortgage on a formal rental unit.

    But here’s the kicker: they were teaching a class on… wait for it… you guessed it; personal finance!

    Advice included “save up money for a 50″ flat screen TV, instead of buying it on a credit card”; sound advice, I suppose, but “don’t buy junk you don’t need” apparently wasn’t even on the table.

    I really wanted to comment on the whole paying interest on debt while getting a lower return on savings thing, but I was too chicken to call out the teacher in front of the class.

    Reply
  • James January 10, 2012, 11:32 am

    Reading this in January 2012, my first thought was that given the market right now paying off the mortgage with money from Vanguard was the right call. Then I did the correct thinking, and reminded myself that the right call doesn’t depend on future observations. I tend to look back too much instead of looking forward. I like how you are constantly looking forward and am greatly enjoying your blog.

    Reply
    • MMM January 10, 2012, 1:18 pm

      Thanks James! Yeah, looking back, this makes me feel pretty smart about that stock sale as well. Since then I have had the opportunity to buy most of those shares back at lower prices, with the added bonus of no mortgage payments.

      In general, paying off your mortgage is a good formula for early retirees, especially if the mortgage interest rate is above 4%. The savings are equivalent to just good, guaranteed, non-taxable income that lasts forever.

      Reply
  • Miguel MiniMustachio January 21, 2012, 12:02 pm

    Thanks MMM for your many words of whisker wisdom.

    I found your blog after the MSN Money post, and I am slowly working through your posts from the beginning. Lots of geat stuff that has helped me open my mind to other options and (hopefully grow some peach fuzz)

    Short history- I purchased my first house at 21 yrs old for 55k @9% for 30yr note (Had no established credit)

    2 years later I refinanced down to 46,800 @ 5.375% for 15yr note.

    3 years later- This month I have just converted my 1st mortgage to a 2nd mortgage of 30k @ 4.25% (cutting my required pmt in half, saving interest, and saving 3k in not having to pay closing costs!)

    I do have student loans (boo!) about 22k, but no other debt

    I am contributing to my 401(k) and have an IRA as well that I started since I was 18. I also have substantial liquid savings, earning poor interest rate of course, because I am unsure about what my next mustache step should be. I believe at my current savings rate I could probably payoff my student loans or my house some time next year.

    My questions: What would the MMM recommendations be in these different scenarios?

    Payoff student loans vs payoff mortgage or

    continue to save for a house I really want (i strongly relate with you for spending more on a nicer place to live while living more cheaper than average in other areas, so as not to take away from my early retirement goals)- I would keep my current mortage, but have family rent house for passive income of about 200.00 a month after pmt/taxes/ins. I also thought of paying off mortgage and then looking for house, but of course savings would then be low until built back up.

    I do realize there’s alot of info still up in the air, but newer house would be more expensive albeit closer to work to enable biking. The houses I would want would definitely increase my costs and limit my savings ability.

    My main struggle with my decision is I know it has taken me 5yrs to build up savings to current level, and I want to make the wisest decision.

    Oh and student loans are roughly 6-7% which I realize is costing me more than house, but the peace of mind of no mortgage is greater than it would be for these.

    Thank you in advance for your input! (sorry for long post, but looking forward to your swearing opinions -even though I’m a non-swearer)

    Reply
    • GregK May 3, 2012, 2:28 pm

      Miguel,

      You’re in a great spot for 26 years old!

      I don’t quite understand why you’d feel better intrinsically about having your mortgage paid of vs your student loans (maybe you can explain it to me?)… but even if you really would, you’re not retired, so you have to make the financially smart (mustachian) decision, not the one that feels good! Get out from under that student debt ASAP. You probably want to hang on to a bit of a cash cushion, but eliminate as much as possible immediately.

      Once you get that half-a-credit-card-debt paid off, you can split the monthly savings (I’m guessing something like $4-500?) between increased retirement saving and extra mortgage payments (again, here, with a 4.25% mortgage rate, it almost definitely makes more financial sense to invest, but I’ll give you half of this one, since it means a lot to you, and it’s really a win-win!).

      Good luck!

      Reply
      • Miguel MiniMustachio June 20, 2012, 4:45 pm

        Thanks very much for the advice, Greg, I appreciate it. I have pretty much come to that conclusion as well. My focus is now to use most of liquid savings, and see if I can get student loans paid off by the end of this year at the latest.

        I’m very tempted to just use all savings and rest of HELOC to pay off student loans next month. However, if something were to happen I would then have no cash to rely on for about a month. So I’m a bit nervous doing that.

        As far as the intrinsic value, there’s something amazing in the feeling knowing that I will have paid off my first house in under 7 years, and the fact that no one could take it away if I was to lose job, become disabled, etc. Perhaps this is one of my nagging voices.

        So, maybe I should, at least eliminate as much as possible, retain a couple months of cash cushion for peace of mind, and remained focused to payoff the remaining ASAP. As your suggested

        Oh, and good news, I will soon be transfering closer to home, which should enable more biking! (My first adventure I made it 5 miles away, and on my way back got a flat tire)

        Reply
      • Miguel MiniMustachio January 28, 2013, 7:51 am

        Well GregK, bad news is that it took me one more month than I had hoped, but good news is I have paid off my student loans! It took me almost two years to the exact date of my first payment to get rid of 26k, but this next month I should get my Zero-Balance statement! Boo-yah!

        Reply
        • GregK January 28, 2013, 9:55 am

          Nice work! Congratulations, and happy ‘Stash growing!

          Reply
  • KittyWrestler June 20, 2012, 9:55 am

    Sometimes when we make decisions, we are making those emotional ones rather than rational ones.

    I have a $80K mortgage at 5.65% on a rental condo. I should just use the excess cash to pay it off, but my hubby felt that it’s nice to sit on pile of liquidable asset such as stocks, bonds and cash. I think I am going to bite the bullet and throw our cash at it. Even though at the end of day, I would only have little bit of cash sitting around, but I still got those stocks and bonds and worst case scenario, line of credit on our home, I think it would be OK..
    It’s hard to do though.. but I am going to do it..

    Reply
  • brenda from ar October 17, 2012, 9:57 pm

    So, Erica @ NWE enlightened me about your site here, and I’m hooked.

    I’m too old to retire young, however, my company included me in a huge lay-off about 5-6 years before the planned Retire Date, so, retiring young for me. I thought I liked my job reasonably well, until it was gone. Then, I became committed to not returning to the cube. A few little health issues played into the picture too. My theory was to reduce expenses as much as possible (whacking budget by 38%), and patch together a few “quilt blocks” of income to stretch things. If you can have high quality of living in the lower tax brackets, you’re so much better off than chasing more income.

    Shiny-new doesn’t impress me much, but tiny tuna can cars scare the crap out of me. I drive an ’03 Buick LeSabre (24-30mpg), bought as a bank repo under $3900 about 3 years ago. My banking/investing is fairly clean, though a few tweaks wouldn’t hurt. The thing I haven’t gotten my head around is 401k balance vs. mortgage. Drawing down the 401k, they take 25% for state and fed tax, no matter what bracket you live in, though it corrects in the next year’s tax filing. I wouldn’t think drawing $80k to pay off mortgage would be a good option, but drawing more than basic expenses, while staying in a modest tax bracket, and using the excess to chunk down principle might make sense. Or, just making normal payments might make more sense. With $220 to principle and $340 to interest (5%), I haven’t got a grip on the math to figure out where it might make sense to boost prinsiple. Would welcome your thoughts on this if you’re willing. Thanks. And thanks for this blog.

    Reply
    • gr8bkset December 21, 2013, 5:34 am

      Brenda, i too got laid off, but luckily had been preparing for early retirement (by 20 years) and was glad to walk away from the cubicle. I think you’re doing the right thing by not drawing down from the 401k early and getting taxed/penalized. Your mortgage indicates that you’re still in the front half and it would be comforting if you can pay it down early and not have to pay all that interest to the bank.

      I bought my house 3 years out of college and was scared to death to lose my job. To lessen the risk, I had 2 spare rooms and took in at least one renter and applied the rent toward paying off my mortgage. Initially it f felt a little uncomfortable to live with a stranger in my home but I was fairly fresh out of school and got used to roommates pretty quick. Over the year, I estimate that they contributed to at least $50k of my mortgage and some have become friends or at least good company at the end of each day.

      Perhaps you can do something like this – at least until retirement age and SS kicks in and the 401k penalty goes away.

      Reply
  • GrowaMo November 5, 2012, 8:18 pm

    Hi MMM,

    I just started reading your posts from a mention at the YNAB forums… during work hours which must be a double whammy – getting paid whilst reading how to save money! (Only short-term I might add, as eventually someone will notice!)

    I am suffering from various forms of debt (mortgage, car, scooter, credit cards) but earn a very respectable income (and actually like renovating too, hmmm). I’ve got some form of extra life-insurance savings policy set up with Zurich which sucks $240 away each month to be put into a fund which has had limited returns over the past few years. Would I be better to stop payments temporarily, or even try to cash out (despite the penalty I’ll be struck with for taking out the money pre-60 years old) to service some of my debts?

    Logic says I probably should at least pause the payments… cost of debt ranges from 7% (mortgage) to 20% (highest credit card rate) so directing $240 to those cards will save me 7% at minimum, whereas they haven’t been yielding 7% in the life insurance-type investment (no one knows what the future holds…)

    As for trying to cash out… there is a surrender charge applied of minimum $1,000 + a variable amount depending on the time to maturity… which suggests the fund would have to perform really bad to make surrendering a good choice.

    What would MMM do?

    Reply
    • Mr. Money Mustache November 6, 2012, 7:09 am

      Dude! Are you crazy!? Until the credit card debt is paid off (and anything else over about 8%), you should be in BURNING HAIR EMERGENCY MODE!!.. That means no money goes ANYWHERE – to savings, restaurants, popcorn, clothes, or even to food other than rice and beans, until that crazy shit is cleared up. Sell you car until you can afford one in cash. Use a bike instead of a scooter if your commute is less than 8 miles. Getting roommates and moving back in with family are entirely appropriate with debt that bad as well.

      The life insurance savings policy is another issue – in general, these are a bad idea because of fees and sketchy investment methods. Do your investing with Vanguard index funds if you want to keep it simple and efficient. But only after high-interest debt is paid off.

      Reply
  • Trish January 4, 2013, 7:46 pm

    Found you through Jim Collins’ blog (http://jlcollinsnh.wordpress.com), and am reading through your posts from the beginning. Love it. Live it.
    1. On the bank accounts, you are so right! Plus, if you are a good customer, you can ask them to remove those pesky international ATM fees – and often, they will. (I travel frequently, and it makes a difference!)
    2. I have my home paid off, (I hate debt) and have a home equity line of credit which is currently (and usually) at zero. I do so well with my Vanguard Index account, that I often think – someone more aggressive than I am would probably borrow from the line of credit – and invest that money in Vanguard – then take it back out and pay off the line.
    Just curious what your thoughts on doing this might be.
    (I probably wouldn’t – just don’t need to.)
    (I have sent your blog – and Jim’s – to all my kids and all my employees.)

    Reply
    • Dollarbill March 12, 2014, 10:52 am

      Hi Trish,
      Typically HELOC agreements prohibit you from borrowing funds and then using them to invest in the market.

      Reply
      • Gerard July 5, 2014, 8:48 pm

        Not in Canada. In fact, many people do this as a roundabout way to make the interest on their mortgage tax-deductible (which it otherwise isn’t in Canada). Google “Smith Maneuvre”.

        Reply
  • Jeff August 15, 2013, 11:09 am

    New to this blog. Love it. I have 2 years’ and 2 months’ of past entries to catch-up on – but I am determined to read through each. As for this one, I liked your decision to go completely debt free and shed the mortgage. Obviously, your Vanguard funds probably went up even more than at the time of this post (with the market at near record highs right now), but I’m guessing (and it’s just a guess), that you more than made up for that lost potential increase by putting the dollars that you would otherwise spend on your mortgage payment to good work. Cheers to you for spreading the word.

    Reply
  • Elaine January 28, 2014, 4:45 pm

    It amazes me how people can’t think through what seem to be simple situations – I owe so much, I have so much sitting around doing nothing – and do something about them. And being killed by bank fees on multiple bank accounts. But I think it’s more prevalent than one would hope.

    I, too, am reading through from the beginning. My husband and I are in good financial shape, but one can always learn more.

    Reply
  • Briana May 10, 2014, 2:44 pm

    Hey MMM,

    I have become totally addicted to your blog, and am ready to start a serious savings plan.
    My husband and I make very little money (about 45k per year combined income after taxes), but thankfully the only debt we have is a $6,700 car loan on my 2006 honda civic with 58k miles on it, and I’m sort of crazy about saving as much cash as possible (we have about 8k total to our names).

    My question is: do I pay off the car loan before investing our savings in a vanguard fund? The loan is 2.9% APR, which is extremely low. I don’t know what makes better financial sense: paying $190 per month for the next three years to pay off the car, or paying the entire thing off within the next few months and them starting a vanguard account afterwards?

    Please let me know what the best option is. I am going to have the “talk” with my husband today about where else we can cut expenses to save even more.

    Thank you!

    Reply
    • Noblewolf May 13, 2014, 11:45 am

      Hey Brianna. Don’t know what MMM would advise you but if I were you I would pay off that car loan before start investing your savings. Use that money in savings to pay off that debt. Feels really good debt free. If you haven’t started, start looking ways to cut your expenses and dump all that savings to VTI. Good luck!

      Reply
  • Caitlin May 20, 2014, 10:48 am

    What an eye-opener!! Reading this article on my lunch hour and doing some quick math, I realized I can be debt-free in two months… Thanks MMM!!

    Reply
  • skim June 3, 2014, 8:24 pm

    I’m hooked! My fiancĂ© and I are making waves to save and start our lives together in the MMM way :)
    I am recently engaged and am trying to figure out what our next step is. We have drastically cut out eating/drinking out and useless spending for stuff. at the moment we are trying to save for a wedding 10K is our budget. I think we’re in a great spot. I have no debt but have a mortgage. The other half has a few smaller debts that we are trying to clear by pulling a credit report and paying off past debts, mind you we are making deals with creditors. This post made me think cause I know that the other half has a credit union account and his 401K. No Roth IRA which i think we may need to open one soon. I on the other hand have a 401K (3K?)that hasn’t been touched since 2006 when I left my corp job to become self employed. I bank at 3 banks one with a savings and Roth, one since I have had this account since 1992 (helps the credit score?) and this is a way my family and I can transfer money to each other. and my credit union with like 8 different savings for different occasions. How Do I consolidate? What kind of an account do I put all our early retirement savings into?

    Also we put 3% on our first house last Sept. So we are paying a mortgage insurance. I had 10% but didn’t see the reason to pay 10% if we were paying a mortgage insurance anyways, and used the 7% as a financial buffer. Would it be wiser to place the 7% towards the principle and get the mortgage insurance to fall off sooner or save it? i’m sure you have a post about this that i haven’t read yet but i thought i’d just ask :)

    Reply
  • Etana June 21, 2014, 8:06 pm

    MMM,

    I really wish my significant other and I had been able to follow your system when I first saw your blog in 2012. Ah well, it is NEVER too late to start! Thankfully, I have always been frugal but my savings have been sitting around doing nothing mostly.

    I am a professional organizer for people’s homes and garages, etc. One of the things you realize when you see someone who has a hoarding problem is they are actually wasting money just by wasting space! They don’t know what they have so they buy more of the same, or more cleaning supplies than they would need if the place were neat and organized. One of my clients actually has squirreled money away…and has no idea where. Together we have found hundreds of dollars in envelopes and socks around her house, and she is always saying she is in a financial bind. I am wondering if you have already addressed this or think it would be something worth addressing on this blog! If you already did, I will get to that post in good time :)

    Loving seeing my old habits of frugality shared by others who are HAPPY!!

    Reply
  • missj August 16, 2014, 12:10 am

    I must admit I was just like the girl in your article until very recently…actually I still have too many accounts open, but at least I am moving the money towards debt service.

    I used multiple accounts as a way to discipline myself “This account is for vacations” “this account is for orthodontics” “this account is for emergencies” meanwhile, I would sometimes carry a credit card balance a couple of months because my main checking account it was linked to didn’t have enough to pay off the balance in full!

    I’ve seen the error in my ways and I’ve already paid down all the credit cards to zero and am working on freeing up enough cash to get the car loan down to zero. luckily I don’t have any student loans, and I’ll attack my mortgage last.

    Reply

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