How many bank accounts do you have? Often, people that have just one bank account, particularly if they’re younger. Now the problem with having just one bank account is that all money is mixed up. Savings is mixed with spending. It makes it harder to track whether savings are growing and because it’s too accessible, it’s too easily spent. It becomes really hard to get ahead and know if you are saving anything at all.
Let’s talk about how many bank accounts you need and what’s the best way to set them up.
My money philosophy revolves around separating money separating for different purposes whether it’s for spending for saving, and even separating short term savings from long term savings. For me, it’s always worked well to organise money by separating it. Some out of sight for long term savings and some closer at hand for short term use in different bank accounts. Now I don’t mean having 10 or 20 bank accounts but you need to have at least two preferably a few more.
Having a second bank account is critical. Your first bank account should be your everyday transaction account which holds a little bit of money to keep you afloat for day-to-day transactions. Your second bank account (which you must have) is for savings. You have to separate your savings otherwise it’s hard to know if you’re progressing. Also, holding your savings account with a different institution to your everyday account helps to move your savings away from eyesight and out of mind, so you don’t see it often and can’t access it with an ATM card.
The absolute minimum number of bank accounts that you must have is two, however, really, you need a few more. Personally, five bank accounts work best as follows:
1 “The Everyday Account” Money is deposited and day-to-day transactions are debited.
2 “The Savings Account” Held with a different institution. No ATM card access.
Separate your money further for different purposes (different buckets) to limit the amount of money that if left in the everyday bank account and accidentally spent on life.
3 “The Bills Account” Put a fixed amount of money every month or every week every fortnight whenever you are paid to cover all of your regular, fixed bills such as phone, gas, rent/mortgage, gym memberships, subscriptions etc. Anything that is pretty much the same amount each time, although even if it varies by a few dollars it doesn’t matter. It all washes out in the end. Add up all of your fixed regular bills as many of them as possible and work out the annual amount (total divided by 12 months). Put that regular amount into the bills account so you never have to worry about paying a bill on time again. You’ll know that the money is always there. A bills account will also allow you to advantage of paying bills annually instead of monthly which quite often can make them cheaper. Just use the money that’s in the bills account because you know it’s earmarked for bills (and bills only). Don’t touch it for anything else number.
4 “The Emergency Account” A cash buffer in case you get hurt or sick and can’t go to work, lose your job or another absolute crisis happens. Everyone needs some emergency cash. The minimum is cash equal to one month’s worth of expenses however, but ideally, a buffer equal to three – six months’ worth of expenses needs to be built up over time.
Depending on how good you are at earmarking money for certain reasons you can consolidate the emergency savings with the rest of your long term savings that are held with the other banking institution. It’s up to you but if you need to keep things separate especially whilst you’re getting your head around establishing an emergency account for yourself so that you know how much is in there then use a separate bank account.
5 “The Just In Case Account” We are here to enjoy life we only get one shot at it and I don’t believe in missing out on what you want just because you can’t afford it. I do believe that a lot of people can afford more than what they think they can in life if they have savings to access and their cash flow in check. A just in case account can be for anything you like. Usually, I use mine for travel – that is what I love what I live for what I work for so it’s my travel account (that’s what I’ve named it) and I put a regular amount in there every time I’m paid that goes towards my travel for the year.
If you are not into travel, replace the name (purpose) with anything else that floats your boat more! Perhaps you enjoy buying new clothes regularly, or tech gadgets etc. This is the account you regularly save to even if you don’t even know what you’re saving for! Something will pop up in life it always does so there needs to be an amount of money going in that account every single time you are paid no matter so that when you see something you want, you’ll know you can go and get it straight away. You won’t have to think about how to save for the purchase as you will already have the money.
That’s exactly how I set up my bank accounts – I have five accounts. Four with my usual bank and one with a different institution that I can’t see that’s used for my long term savings. For the accounts that I use and dip into often like my Bills Account and Everyday Account, they are just using regular bank accounts. For those, it’s not worth the time and effort chasing great interest rates for everyday accounts as most banks pay nominal interest (close to nil) so it’s not worth mucking around, however, for long term money that won’t be spent any time soon, such as a Savings Account, that must be held with a different institution so it isn’t seen easily. You have two options when it comes to those accounts (1) a high interest bank account, which will pay you a higher interest rate than a run-of-the-mill bank account, or (2) if you have a home loan, consider using an offset account.
An offset account sits attached to your home loan and for every dollar, you have in that offset account it essentially reduces your loan balance that the bank uses to calculate how much interest you have to pay so if you have for example a $300,000 home loan if you have $10,000 in your offset account the net loan balance will be $290,000 that the bank will use to calculate interest. This can save you a lot of money when it comes to a home loan especially if you have your savings in an offset account for a long period. Over the 30 years that it takes on average to repay a home loan that can save you thousands of dollars in interest and help you repay the loan faster so speak to your lender about an offset account if you have a home loan.
Want to know more?
If you want to know more about this, check out the Money Messenger book. In it, I detail all of my financial secrets and strategies including how to set up your bank accounts and organise cash flow, plus how to repay debt fast, increase wealth, invest money and buy proper insurance. On page 74 you’ll find more info on setting up your bank accounts correctly. There are even graphs to show you exactly how I’ve set up my accounts and how you can do the same so that you simplify your money and automate your bills ad savings so you can set and forget and move on and enjoy life. Check it out here: www.moneymessenger.com.au/book
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Disclaimer: This information provided is general in nature. It is based on the knowledge and experiences of the author and not intended to be taken as financial advice. It does not take into account the objectives, financial situation or needs of you or any other particular person. You need to consider your financial situation and needs before making any decisions based on the information. You may have to modify the information and do further research, for it to suit your personal financial situation. Therefore, before acting on the information, it is recommended that you consider its appropriateness to your circumstances or consult a financial adviser, tax advisers or legal professional to assist you in doing this