Use Multiple Bank Accounts To Enforce Your Budget

It is not hard to create a budget. Most people can do it, at least those who read about it can. So what factors make so many people fail at following their set budgets? Temptations, impulse shopping, expensive entertainment habits - all of these can cause a problem, but at the root it is quite simply that people, especially twenty-somethings, tend to spend what they have.

The solution? Take away what they should not have, and more realistically, what they do not have.

There have been books written about how to budget with such strange ideas as taking your money for purpose X and putting it into a jar for the week, there is even a television show on TLC that tells you to do exactly that. However, it is far too easy to forget to put the money in or to dip into it. Something more automatic needs to be done to solve the problem to help twenty-somethings save money; enter the multi-bank account savings approach.

When implementing the multi-bank account savings technique it is critical to first set a budget. The budget should break down costs to the shortest possible time frame. For instance, if the mortgage is paid bi-weekly and your pay schedule is also paid bi-weekly, you’re in luck. However, problems may still arise if you get paid bi-weekly and your car payments, electricity bills, heating bills, phone bills, and everything else are to be paid on a monthly basis. This need not a problem, it merely adds a bit of complexity to your planning.

What you need to do is take your budgeted monthly amount and split it into two. If your heating bill is $100 then with every pay you need to put aside $50. This should make perfect sense.

The next step is to create the multiple bank accounts. Several savings accounts should be created, preferably accounts that are somewhat difficult to access when out and about (making it less tempting to withdraw some cash). Once this has been accomplished, the next thing to do is to set up an account for bills that are automatically deducted and do not fluctuate. Mortgage and car payments are a perfect examples of these bills.

A quick personal example:

For a variety of reasons my mortgage payments are withdrawn semi-monthly but not in equal amounts. A large amount on the first of the month and a small amount on the 16th. Because I am paid bi-weekly ,with every pay I take half of the total monthly amount and deposit it into a holding account. This is done with pre-authorized transfers, and I do not have to worry about doing it myself. On the day before my mortage payment is due, a transfer is made for the amount required back into my chequing account. I don’t have to do a thing, and there is never any chance that I will have a shortfall. I do the same for my car payments.

To break it down in a more simple fashion, if my payments on the first of the month are $700 and on the 16th they are $200 I then take half the total amount ($450) and transfer that into a holding account with each pay. It looks something like this:

Date	Transfer	In Holding	Comment
Jan 11th	$450	$450	Into Holding
Jan 16th	-$200	$250	$200 Mortgage Payment
Jan 25th	$450	$750	Into Holding
Feb 1st	-$700	$0	$700 Mortgage Payment
Feb 8th	$450	$450	Into Holding
Feb 16th	-$200	$250	$200 Mortgage Payment

It repeats like this. As you can see, in the months where there are 3 pays, I end up with some extra money in my mortgage holding account. I don’t foresee this extra money will pose a problem for me, or for anyone else in my place for that matter.

For bills that fluctuate and are not automatically withdrawn, a separate account should be used. The budgeted amounts should be automatically deposited into this account, but they will not be withdrawn on any fixed date. The money should be withdrawn manually when a bill comes in.

This sounds more complicated than it really is. The simplest way to think about it is that every recurring bill you pay is automatically withdrawn from your account on the very day that you are paid. Every dollar you have left the day after you are paid is yours to sustain yourself until the next payday.

The question should arise at this point, what should happen if one of my fluctuating bills becomes larger or if some unforeseen expense should arise? Beyond having holding accounts for automatic payments and manual payments, you should also have some savings built into your budget. So with every paycheque you save a portion of money that is there for a rainy day. Some experts will tell you that this saved amount should be roughly three months of salary. That sounds like it should be a large safe amount, so we will go with that.

Using the multi-bank account savings approach, your finances can become a little simpler by using several bank accounts to hold your money until it is required - be it two days or two weeks.

Tags: automatic deductions, automatic tranfers, Budgeting, high interest savings accounts