Money Management: The Three-Account System

So you’ve got a bank account. Fantastic. Everyone needs one of those. You might even have a checking account and a savings account. Even better!

That’s the traditional system, and it works if you’re absolutely vigilant about your spending. It can be tough to avoid accidentally spending your bill money on an emergency expenditure, though, and you can make a numbers mistake and have everything bounce on you, which is a fiscal nightmare. I’ve even had a company accidentally double-withdraw me, which if I hadn’t had my ducks in a row could have really messed me up good. The closer to the line you walk financially, and the less cushion you have, the more likely this is to happen.

The traditional system is trouble for people who aren’t good with numbers or who like to act spontaneously. I know a lot of these types of people. Enter the three-account system. Here’s how this works:

You have a checking account with your local financial institution, a bank or credit union that has local branches and ATM’s for your daily financial needs. This account also has a debit card tied to it. This is what you use for your groceries and other day-to-day purchases. If you want to go to the movies or out to dinner, that expense comes out of this account. If you don’t have enough money in the account to go out to dinner, you can’t afford it.

You also have another checking account with a different financial institution, preferably one that does not have a local presence in your town. It might be an online-only bank or an institution that does not have branches in your part of the country. Mine is a credit union based on the opposite coast whose nearest branch is two hours away, but who has a nice suite of online tools. This account’s sole purpose in life is for the payment of your bills. Your rent, electricity, water, phone, car payment, and so forth all come out of this account. You ideally should not have a debit card for this account, and if you do, that card definitely does not belong in your wallet. The goal is to let this account largely manage itself.

The third account is a savings account at the same institution as your bills-only checking account. Its job is to be your rainy-day fund. A rainy-day fund handles large emergency expenses such as a busted hot water heater, a car accident, or emergency dental work. It can also handle your bills in the event of a sudden job loss, but should not ever be used to fund things like vacations. If you want a savings account for fun stuff like vacations or a house down payment, establish another savings account for the purpose. It’s okay to have two or three savings accounts.

Most employers today have the ability to direct-deposit your paycheck, and most of those have the ability to split your paycheck among multiple accounts. To start the system, establish all three accounts, then calculate how much your fixed bills are every month. If your electricity fluctuates, estimate the average for a month. If you want to set aside savings every month towards your rainy-day fund, that counts as a bill. (Pay yourself first.) Have your employer deposit the total amount required for all your bills into your bills-only account, and the balance into your everyday checking account.

💡 When making any financial calculations, round every expense up to the nearest dollar if it’s an expense, and down to the nearest dollar if it’s income. This means your budget accounts for more expense and less income than you really have, and the change becomes a little kitty sitting in the bottom of your checking account. Over time, this little pool can add up to significant savings that can rescue you from a calculation error or a double-withdraw like the one I mentioned at the top of this blog post.

If you block out monthly savings among your bills — and I hope and recommend that you do — you can then set up an automated transfer to tuck that amount away in your savings account every month. Voilà! You’re saving money every month before your I-want-those-shoes urges ever see that money.

I actually deposit a bit extra into my bills account every paycheck. This lets me retain enough money in my bills account that I don’t care when the bills land. They could all land on the same day and I’d still be okay. I have enough stashed in the bottom to handle it. This might not happen for you right away, but if you tuck away a bit extra from your direct deposit, it builds up over time.

A Final Word

The goal of any budget is to ensure that you spend less than you earn, a state of affairs known as “living within your means”. If you treat savings as a bill to be paid every month, you’ll end up living beneath your means, which is even better. It’s not something that most of us can achieve quickly, but small accounts and good habits add up over time.

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