Managing Your Finances: Accounts With A Purpose

 

When it comes to personal finance, most people only have one or two bank accounts: either just a checking account, or a checking and a savings account.  For some people, this is fine, but more often than not, it makes it very easy to get into financial trouble, either due to a forgotten transaction, or an account not being updated at the right time.

Rather than dealing with the headaches of having to account for everything, and hoping that nothing was forgotten that could cause an overdraft with your car payment, rent, or any other bills, it probably is a good idea to look for a local credit union or two and open an account. In addition to easier budgeting with dedicated accounts for each bill, there is an added bonus that these accounts offer: access to lower loan rates, and higher interest rates on your deposits.  Taking advantage of both of these can make a huge difference in your monthly balance sheet, especially when you want to get out of debt faster.

This method of account management can be called things the silo method, or the envelope account method.  The fact is it’s just more of an advanced version of the envelope method, where you keep your money in cash, and use envelopes to budget your monthly expenses.  This method provides an additional layer of reporting for you, allowing you to see exactly how you spend your money by utilizing online banking tools, while also keeping things in a setup where you can begin scheduling automatic payments on your bills and build an emergency fund on auto pilot.

The most difficult step for most people here is going to work and requesting the new direct deposit sheets from HR. Normally, it only takes a few minutes to fill out the forms, and many companies even have an online option now, making it easier than before.

With setup complete, let’s take a look at a case study:

Dexter receives $1000 bi-weekly in take home pay from his job at the Miami Police department. He has two condos, each with a monthly mortgage payment of $300, a $30 electric bill, a $40 gas bill, two credit cards with a monthly average spending of $100 on each, $150 in student loans, and $175 in his car payment. Here’s his plan:

Check 1 Check 2

Mortgage

$300 $300

Gas/Electric

$40 $40
Credit Cards

$110

$110

Student Loan/Car $175

$175

Remaining $375

$375

 

 

 

 

Now that he has a plan, he sets up his direct deposit to go to each of the accounts, with the higher bill as the amount deposited each paycheck.  This leaves him with a buffer for when the bills like gas or electric are a bit higher, while also giving him the opportunity to build up his emergency fund and pay down his installment debts.