Around 34% of Americans have $0 in savings and 69% have only a couple of hundreds. If you are one of those people looking at a near empty savings account, or numbers in the red, its time for a new strategy. In this article I will explain how having multiple savings and bank accounts can help you to easily keep track of your spending in order to save more money.
There are many strategies on how to save more money. You can make extensive excel tables and sheets and keep track of them or fill in your spending in apps that you need to keep track of daily. In this article I explain you an easy way to keep track of spending by having multiple bank accounts and which you one you need exactly.
People who are short of cash or people who receive budget coaching are often advised to put the money for different jars (house, food, clothing, etc.) or in an envelope. That way you can see in one go how much money you can still spend on something and this helps you to keep your personal finances well organised. However, more and more people just don’t pay with cash anymore, they pay digitally. Having multiple bank accounts works pretty much the same as the previous system with the envelopes and jars, you just put the money in different bank accounts. Does this really help you to manage your money better? Hell yes! We humans are very smart, but we have so much on our minds like work or school, family, friends, and maybe or diets and exercises plans that we don’t have enough head space to remember how much we spend. When it comes to money, we tend to therefore unconsciously (!) overspend. People also use shortcuts to limit the amount of thinking about these things. For example, we are asked to go out for a nice meal and look at our bank account. We see more than enough money so we go out for dinner, spend a normal amount and the next day comes the hangover: suddenly there is only 10 euros left on your account. What gives? You probably forgot for a moment that you still had to pay the rent and your mobile phone was also charged just that day. Now you suddenly have to live another week of 10 euros. I hope you like noodles and bread with water! Jars and envelopes helped to ensure that we do not end up in situations like this by separating our spending. We have a jar or envelope for groceries and for our fixed costs like rent and subscriptions.
Yet this system is also not without problems. Just look at what you can all make jars for: rent, food & drinks, clothing, transport, care, hairdresser, going out, gifts etc. The more categories you make, the less of an overview you keep. Maybe you have a housekeeping booklet, on paper or in excel, or a flashy new household app that tells you all this. If you keep that up to date on a daily basis, you will be able to keep the overview. Right? The question is whether you have enough head space to fill this in so consistently. It might work for some people but it is not exactly an interesting task and more like a chore for most people. There is also another problem that comes up. Research has shown that we also spend what is in those categories on that exact category. In that study when the price of gasoline was lowered, it turned out that many people then suddenly switched to the more expensive variant gasoline. So where people are supposed to save money, they actually spend the same. So saving really does not seem so easy.
How do you prevent this? Again, by having multiple bank accounts. Nevertheless, we want to prevent the situation with the jars, so we should not have too many categories either. I will explain below which bank accounts and thus categories are useful. Some accounts are payment accounts and others are savings accounts.
There are about 4 accounts that I think are really necessary and also advise every person who wants to keep a grip on his money and does not want to get into money problems. That is a total of 3 checking accounts and 1 savings account.
1. Payment account: Fixed costs
The first thing you want to do is separate your fixed costs from your variable costs, so you create a special payment account only for your fixed costs. Your fixed costs are all costs that charge the same amount monthly or weekly, such as rent or mortgage, insurance and subscriptions (for example, Mobile phone, Internet & TV, Train, Meal box, Gym). By separating these fixed costs from your variable costs, you will no longer be surprised by sudden charges to your account. You also prevent late payments that can result in additional charges.
Every month you deposit a fixed amount of your income into this account (salary / allowances / student finance). First calculate how many fixed costs you have and make sure that the moment you receive your income, that fixed amount of income is transferred to your fixed cost account. Make use of fixed transfers to this account, since your fixed costs are the same every month. Although you will receive a debit card for this account, keep it somewhere safe at home, you will never pay with this card and only transfer that fixed amount of money to it.
2. Payment Account: Groceries
In addition to your fixed costs, the account you need is a grocery account. Many people have a month left at the end of their money and that often results in extracting money from your savings account or eating bread and water or noodles for the rest of the month. That’s why we create a separate account that is only intended for groceries. By groceries we mean necessary groceries, so bread, milk, spreads, breakfast cereals, vegetables, fruit, meat, pasta, rice, etc. This is not meant for having a drink somewhere, going out for dinner, or that croissant at the train station! The easy tip is to only use it in the supermarket but in most supermarkets you can often also buy socks, oven dishes, cutlery, DVDs, books & magazines and things like that, and they should not be paid with your groceries account! If possible, I would also remove wine, beer and other alcoholic beverages. These are luxurious spending as they cost relatively much and add relatively little. Water and soft drinks are generally a lot cheaper (and water from the tap costs almost nothing!). You can pay the alcoholic beverages and all the non-food items with the next payment account: Personal expenses.
3. Payment account: Personal expenses
Now you don’t have to think about your monthly payments anymore and you can eat normally until the end of the month, you can set money aside for nicer things. From the personal expenses account you pay most of you variable costs. This includes for example your clothing, the hairdresser, transport (car / bicycle) but also laundry detergent, makeup and of course any trips and vacations. Calculate how much you want to spend each month and how much you want to save. Every month you make a fixed transfer with this fixed amount you you Personal expenses account. This way you prevent your personal expenses from running out hand. It also gives you a simple overview: this is the amount you can spend and every cent more you have to manually take out of your savings account. You will now know and feel it every time you spend too much. The money that you have left (every cent!) in every account at the end of the month is transferred to a savings account!
4. Savings account: Emergency Fund
The first savings account that you must always have is your Emergency savings account. This is an account with your desired buffer that you can use in case of emergency. You do not want to have to pay extra because your washing machine or car breaks down and you do not have to buy a new one, that only costs more money. I have already said in other articles that a buffer of 6x your income after taxes (salary + allowances) is more than sufficient. If you want to take it a bit more conservative, take at least 3x your income after taxes. This bill is for absolute emergencies, not for buying a new cell phone or a nice vacation! It can also be used, for example, if you are fired because it might take a while before you receive benefits if you get any at all.
After you transferred your fixed payment to your fixed cost account, your grocery account and your personal expenses account you transfer everything that’s left to this Emergency Fund account until you reach your desired threshold. At the end of each month, right before you receive your income, any cent that is still left from your payments account is also transferred to this Emergency fund account. You do this until you reach your desired threshold.
5. Joint accounts
Are you no longer living alone? Then it might be wise to open some joint accounts. The grocery account then becomes the joint grocery account and the fixed cost is split in fixed personal cost and fixed joint cost account. These are payment accounts for all the things that you share so for fixed costs that is probably the rent or mortgage and any common subscriptions (internet & TV, magazines / newspaper, meal box). For variable costs this is often going out together, eating out, entertainment (outings, cinema, etc.) and things like that. If you have children, perhaps it is a good idea to also make a join account for the money you spend on your children. Make agreements on how much money you deposit into these accounts each month and automate this with fixed transfers. The most common distributions for money are:
- Equal: you both pay a fixed net amount and the income of both does not matter. This is useful if you both work full time.
- By income: You both pay 50% of the income, for example. Someone who earns more contributes more. This is especially to be considered if one of the two works part-time (for example to take care of the household or children)
- Agreed: you agree annually or monthly how much each of you contributes. This can be useful if, for example, someone is self-employed and the income fluctuated a lot or because someone has higher costs than the other (for example due to higher healthcare costs or alimony).
In addition to your joint account, you have to decide if you want to keep your own fixed costs account and a personal costs account. From this you can pay your own insurance policies and subscriptions (health insurance, gym) and outings with your friends / girlfriends / family and for example gifts and things that you buy for yourself (cell phone, jewelry, gadgets, books etc.). This is a personal decision but if you notice a lot of arguing about what the other person is spending it might be wise to keep some accounts and expenses separate. Personally, I only have a shared grocery account and fixed cost account and one shared savings account for taxes on our house. That way the money that is left is yours and nobody can argue about your spending. Some people, however, prefer everything to be shared. They argue that if you want to share your life with that person, you should also be willing to share finances. It is up to you, just talk to your partner and family what might be wise in your situation!
6. Savings account: Vacation/ House / /Education/ Future / Fun
In addition to a buffer account which you just need most people want to save for the future or for fun things. Maybe you want to buy a house, retire early, or perhaps you are expecting a child and what to save for their education. Most people also want to save for bigger expenses like vacations, new computer/phone/tabled or other gadgets or maybe some cultural activities like concerts or festivals. Thats were these savings account come in. After you have saved up enough for your buffer account you can start saving for the nice stuff. Many people will also use it to save for a downpayment on a house or for a nice amount in addition to their retirement. You can’t start that early enough. You can make a savings account for each goal you have. Just as with the emergency fund savings account, you can put a standard amount of money into this savings account at the beginning of each month when you receive your income and everything left in your spending accounts at the end of the month. If you have multiple saving goals you can decide to fill them up one by one (for quick satisfaction) or you can decide for each savings goal how much you want to save for that goal each month.
7. Splitting accounts further
With the above accounts we split the most important costs so that you at least do not incur any additional costs and you can always eat normally. Next to these crucial account there are still a number of accounts that can also be useful to you.
First of all, you can split the fixed costs account into the necessary fixed costs account (rent, insurance, train) and personal fixed costs account (Cell phone, Internet & TV, gym, meal box, magazine subscriptions). This makes it easier to see how much money you are spending that is really needed and what you like to have but could do without. The personal fixed costs are also always an easy way to save more money, because by cutting them you immediately save a fixed amount extra monthly. Just like the normal fixed account, you transfer the same fixed amount of money each month to the necessary fixed costs account and another fixed amount to the personal fixed cost account.
Secondly, you can also split the personal expenses account into “necessary” variable costs (clothing, car, train, hairdresser, care, detergent) and personal “nice” costs (cinema, dining out, going out, gifts, personal purchases). This split allows you to understand on what luxury you spend your money. This can be particularly useful if you keep overspending on your personal expenses account. Do you spend it on variable costs you can’t really avoid like traveling to your work, or stores or family or are you overspending it one luxury like takeout meals and dining out? Decide what you find more important and limit luxury you can’t afford from creeping up on you. Just like the normal personal expenses account, you transfer the same fixed amount of money each month to the necessary variable costs account and another fixed amount to the “nice” costs account.
8. Savings Account: Monthly Savings
This is something that doesn’t work for everyone but it helped me keep track of how much I actually save each month. This is particularly useful when you know you save each month but want to be more consistent in how much you save each month. This can be useful when you have a specific target amount of savings you want to achieve. When you receive your income you put it all in this account. You then transfer your the fixed amounts for each account from this account to your other accounts. Whats left is what you will save this month. At the end of the month you transfer everything in this account to one of you savings accounts, your buffer account if its not full and otherwise in one of you other savings accounts. This make sure that you can see every month how much you have left and thus saved at the end of the month. It doesn’t work for everyone because depending on your personality you might still spend it, because you can see immediately if it is still above your savings goal and what you could technically still spend Still, it means you must consciously transfer money from this savings account and see directly the amount of savings that you decrease. Decide for yourself if this works.
Currently (2020) the interest on savings account is disgraceful. Do you want to get more out of your savings? Read my article on easy and risk aware investing for beginners!