For people who are serious about managing money, a bank account system is essential. That system has to be understandable and easy to use. The system I use that has served me well over the years is depicted below:
As you can see from the diagram this system involves 4 different bank accounts.
Account 1 – this bank account will receive all forms of income such as your wages, salaries, dividends, etc. From this account you’ll transfer, by automatic payment, a monthly amount to bank account 2 to pay all your bills.
Additionally, you’ll transfer funds, by automatic payment, from account 1 to account 3. This transfer of funds will occur monthly until there are sufficient funds held to pay all your bills for a finite period of time eg: 3 month period.
Finally, from account 1 you’ll transfer, by automatic payment, the amount of money you intend to save into account 4. If you’re running the account system correctly, you should be able to increase your monthly contribution to this account once you’ve established enough money in account 3.
Account 2 – this account will receive a monthly amount from account 1 that will be used to pay all of your monthly bills. Some months there will be a credit balance because you will be building up funds to pay quarterly, six-monthly, etc bills that you know will fall due in future months.
Account 2 should only be used to pay expenses. Accordingly, you’ll need EFTPOS on this account to enable you to pay bills on the spot such as your groceries and petrol.
Account 3 – everyone needs to have funds they can fall back on in an emergency situation. Accordingly, this account should receive funds from account 1 until such time as it holds enough funds to tie you over should a situation occur that impacts upon your cash flow eg: redundancy from employment role. I like to hold enough money to cover my expenses for 3 months. The quantum of funds held in this account will depend upon your risk profile and personal circumstances.
Once you have sufficient funds in this account, stop your automatic payment from account 1. Add the sum you would have been paying to account 3 to the money you are directing towards your savings account.
Because account 3 should be used only in a crisis, I recommend never having EFTPOS capacities loaded onto it.
Account 4 – this is my favourite account. This is where I hold my savings. This account will receive funds from account 1 each month, building its balance until such time as the money it holds is invested. Because all temptation to use the savings money should be removed, I advise never to have EFTPOS capabilities on this account.
Summary
What gets measured gets controlled so be sure to do a monthly review on how you are going with this bank account system. Additionally, increase your success rate in managing your money by reading the next article. In the interim, happy banking everyone.