One of the best things you can do is set up multiple accounts. Think of these accounts of different “buckets” of money. Technology today has made is really easy for us to manage these buckets by spending just a few minutes a week transferring cash and setting auto pays. I am married so I am going to be speaking from a marriage point of view. I have massaged my system for years and I believe its nearly perfect. Here is the basic framework:
- First, you should have your primary checking account established. This is the account where all of your money comes into and gets disbursed from. If your bank offers it, you should also set up some sort of savings account. I bank with Wells Fargo and they have an account called Way to Save where you can set up a monthly contribution from your checking account and, here is the real bonus: everytime I swipe my check card Wells will pull $1 from my checking account and put it into my Way to Save.
- Establish, with a different bank, another checking account and another savings account. I use Capital One 360. The checkings account at this bank will be the mutual account that you and your spouse have full access to. This is the account that your mortgage or rent will be auto deducted from. This account will be used for 2 things:
- one is as use as a mutual emergency fund and
- second is for mutual expenses that you and your spouse share (think mortgage, child care, house bills, etc).
I know a lot of people will disagree me and say your emergency fund should be a dedicated account with no activity coming out of it. I see the logic in this, but as long as you’re disciplined and keep a minimum balance of whatever your emergency account balance is you will be fine. More on this later.
YOUR 2nd “EMERGENCY” FUND
The savings account at this 2nd bank is YOUR baby. The money in this account is saved for big expenses that are exclusively yours (vehicles, toys, trips, etc). Think of it as a savings account that can double as an emergency fund. This account is ONLY YOURS AND NOT YOUR SPOUSES’. Whether or not your spouse even knows about this account is up to you.
Most of all the magic of personal finance can be had with these 4 accounts at 2 banks. The system I use is what I’ve found to be best with my situation. Obviously, everyone’s situation is different, but hopefully you can take away one golden nugget from how my system works. Here we go:
Dividing your Paycheck
I get paid every 2 weeks (every other Friday). My employer allows me to distribute my paycheck in up to 3 accounts before it hits my primary checking account. Before my paycheck hits my primary a portion of the money goes into
- deferred compensation account (before taxes),
- another portion of the money goes into my joint 360 checking account and
- the last portion goes to paying my union dues.
If you and your spouse split the mortagage 50/50 then deposit at least 25% of your mortgage payment into your mutual account with one paycheck and the remainder on the second. Your spouse should do the same and if so, your mortgage or rent will be automatic.
The Mutual Checking Account
OK, back to the mutual checking account. Get used to thinking of this account as house and/or kids. If you have kids, maybe you guys have agreed that one pays child care and the other pays the mortgage. No problem. The money to cover both of those costs goes into this account and the money for both of those costs automatically come out. The same goes for house bills, the money to cover those costs should also go into and come out of this account.
Ok, so you’ve set up your paycheck to auto deduct and deposit money to cover your housing expenses and child care into the mutual checking account. As I said earlier, this account is also your emergency fund. How do you build it? You deposit more than you need to cover your housing/dependent care expenses and bank the rest. Don’t use this account for everyday trips to the grocery store, going out to eat, or buying some paint at Home Depot. My wife and I deposit way more than we need to cover the mortgage and child care so we also use this account to set up auto draft for our house bills (electric, gas, internet, water). The amount we each contribute each paycheck pays all the bills and builds our emergency fund. Lots of money goes in and only some comes out.
Your Primary Checking Account
Before your paycheck hits your primary checking account, its already contributed to your retirement account as well as paid for the mortgage, house bills, and child care- so basically all of the necessities.
Once the balance hits my account, I have auto deducutions set up for my subscriptions such as life insurance, amazon music, icloud storage, etc. I try to keep these subscriptions at a minimum and I know the day they will be taken out so I can plan accordingly.
I also set up auto deductions to contribute to my Way to Save account, my PERSONAL emergency fund, and my Roth IRA. Even just $25 into each of these buckets adds up over time. Now I realize this sounds like a lot, but keep this is mind: Once you’ve taken the time to to set up all of these auto deductions the work is done for you without lifting a finger. My system is set up so that when I get paid, each of these buckets gets paid. The rest of the money can be used for buying groceries, fuel, kid stuff or whatever else you value to do with your money. Rest easy knowing that at least the really important stuff has been taken care of.
Your Primary Savings
This is the savings account you have set up with your primary bank. My primary savings account is my Way to Save account. It is this money, that I don’t touch all year, that I use to buy Christmas gifts. I set up a monthly automatic $25 contribution that pulls from my primary checking account plus Wells Fargo transfers $1 from my checking account into this account every time I use my check card. It adds up big time.
The biggest take away here is to set up multiple buckets of money and automate as much as you can. Automation makes sure your bills are paid and that you pay yourself. But equally important, automation frees up mental bandwidth to spend elsewhere.
I’ll talk more about your retirement accounts in other posts, but just know you should set it up and contribute something. Anything. Build that habit and once you get comfortable with how your system works, you can increase it.
