Over the last couple weeks we have been intentionally consolidating our financial accounts. The credit card I signed up for back in college to get a free t-shirt, gone. The bank account I opened to get a great deal on financing from a local car dealer, gone. It is actually empowering to eliminate the noise from your financial life. Less statements, less chance of identity theft, less balances and account numbers to keep up with.
However, there are good reasons to keep at least one bank account, and one credit card, that you don’t use often for physical transactions. These two tools make up your personal finance firewall, and provide a layer of protection between you and those trying to separate you from your money.
I first heard of a bank firewall account from Jim at Bargaineering. Since, like him, I complete a number of transactions online each month, I thought it sounded intriguing. I’ve implemented something similar in my own finance life, and even taken it a step or two further.
Jim Wang provides an excellent overview of the bank account firewalls concept.
Like Jim, I also think ING Direct is a great place to set up such an account because of their interface for transferring money, and the ease of creating multiple accounts. Of course, there are plenty of other top online banks to choose from.
Most fraudulent activity associated with vendors such as PayPal involves a thief obtaining the user name and password for a PayPal user’s account, and initiating withdrawals from the user’s primary bank account tied to that account. By only having one account associated with various online payment vendors, and keeping a very low balance in that account, you can minimize the amount of money exposed should your online payment account become compromised.
When the couple online deposits associated with business activities hit my bank firewall account I immediately initiate one transfer to my self employment tax sinking fund for roughly one-third of the gross amount. The remaining amount is transferred to my business checking account in the form of profit, from where I write myself a single check at the end of the month (after business expenses are paid) as sort of a bonus salary.
In addition to maintaining the firewall bank account for accepting electronic deposits, I also held onto a single low-interest, high-reward credit card to use specifically for making online purchases and regular monthly subscriptions or recurring bills (Netflix, cell phone bill, etc.). For these types of purchases, I prefer to use a credit card because I am exposing about 99% of the risk to the bank, rather than my personal bank account.
At the end of the month I receive a single statement for the credit card, review the list of transactions for accuracy, and make a single online payment to pay off the card. I choose to make the payment manually, because if fraudulent charges appeared and I did not yet have the transactions in dispute when the bill cycled, an automated payment for the full balance could easily wipe out my associated bank account.
Another benefit of using a single credit card is that I’m able to easily see a consolidated view of my recurring, monthly transactions. I like to play a little game each month and try to bring that total bill down as far as possible.
What extra service can I cut from our monthly routine? Which subscriptions are we just not fully utilizing? How can I shave more off my cell phone bill? The utility bill? It becomes a challenge each month to try to come in under the previous month, and having all the charges billed to a single card helps me see at a glance whether or not I’ve been successful.
If you work online, or receive online payments from a variety of sources, I’d encourage you to set up a bank firewall account to provide a buffer between you and your primary banking sources. Also, consider hanging onto one credit card once you are debt free, and simply running all recurring charges through the card. It makes for a simple billing process, and it allows you to play with house money, rather than your own.