“I’m putting money into separate savings accounts. That should ensure I have the money when I need it”
This is a common misconception that many people have about getting ahead financially.
Many people think that if they have their money separated out into different savings accounts for things like utility bills, holidays, rates and education that this will solve their ‘lack of money control issue’.
What inevitably happens though, because they don’t have a system which factors in every bill including all due dates and frequencies, all their unpredictable expenses, and their goals to pay down debt, is when their accounts fall too low to cover a debt they then have to ‘Rob Peter to pay Paul’ and scramble for money wherever they can find it.
Thus, all their good intentions go to waste, they throw their hands in the air and say ‘what’s the point!”
Case Study – Suzanne
Suzanne, a family daycare business owner, manages her family finances and, when we started working together, she had at least 14 accounts, all with pretty low balances.
Whenever she needed money Suzanne would shuffle money from one account to the next. She never felt like she was getting anywhere, her accounts were confusing, and her debt wasn’t diminishing.
One of the first things we did together was to streamline Suzanne’s accounts down to just 3 accounts for personal (Bills, Unpredictable expenses and weekly expenses) and two for her business (the main business one and a tax one).
In conjunction with her Spending Planner, Suzanne can now see exactly what her bank balance needs to be in each account on every day of the year. Because all her expenses are programmed into her Spending Planner, it’s not hard for her to reach her weekly target.
Our advice on creating a simple but effective account structure
It’s not necessary to keep an ‘envelope’ or bank account for each individual area of saving, such as holidays, utilities, mortgage payments, car repairs, etc.
Envelopes were the only way that people could budget effectively in the old days. These days, all you need to do is simply divide your expenses into THREE main areas and bank accounts:
- Bills Account for Predictable regular expenses
- Savings account for unpredictable expenses
- Weekly Expenses account for food, fuel fun and incidentals.
If you have a business then you’ll also need a separate business account and a separate tax account.
Your bills account is quarantined for dated, predictable bills.
Your weekly expenses account only has a limited amount of money going into it each week and therefore you’re forced to live within that.
And your savings account is dedicated to those things that are a bit ‘rubbery’ (ie. they don’t have a date by when you’ll need that money, but guaranteed you WILL need that money at some point).
If you’re clear about which expense comes from which account, then it becomes much easier to see whether you have the available funds for something discretionary or not, especially if you use the accounts in conjunction with your Spending Planner tool.
Every day we meet people whose flawed thinking patterns are holding them back from achieving their dreams financially. Once they break out of these holding patterns they finally get the clarity they need to make really good financial choices. It’s exciting to witness their blossoming. And that’s why we do what we do.
Photos by Fabian Blank (Piggy bank) and Markus Spiske (child) on Unsplash