How many bank accounts should you have?
Personal finance expert and author Tiffany “The Budgetnista” Aliche thinks the answer is actually quite simple. She spoke to OneUnited OneTransaction, a conference on bridging the racial wealth gap, about her top budgeting tips.
“There really is a four-bucket system,” Aliche said. “And these buckets check, check, save, save.”
1. Current account for invoices
First, create a checking account to pay your bills, Aliche said. You will use the money in this account to pay for housing, utilities, insurance, your car loan – any bills you have to pay.
Aliche recommended that you do not get a debit card for this account. That way, you won’t be tempted to spend your bill money on other things. When you want to spend money, you can use your second checking account.
2. Current account for other expenses
This checking account is for everything other than your invoices. You can use it for entertainment, restaurant meals or gifts for your friends and family.
Go ahead and tie your debit card to this account, as the money is mostly meant to be spent.
3. Savings account for your emergency fund
An emergency fund is money that you only use when the unexpected happens. Maybe you lose your job, your car breaks down, or you get a huge hospital bill. You only get this money in an emergency, so it’s wise to keep it in a separate account from what you use for bills or other savings purposes.
Most experts recommend setting aside three to six months of necessary expenses in your emergency fund. As a general rule, you should have six months of expenses if you are a one-earner household and three months of expenditure in a two-earner household.
4. Savings account for other purposes
Finally, there is an account for other large savings goals. You can use this account to save money to buy a car, put down a down payment for a house, or pay for your wedding.
If you use a bank that facilitates saving for separate purposes, you can even create individual savings compartments for each purpose in a single account. This makes it easier to keep track of how much you’ve set aside for each purchase.
How to manage these 4 bank accounts
Aliche called her budgeting method “divide it before you get it.” If you receive direct deposits, have your employer put a certain percentage or dollar amount of your paychecks into each of these four accounts.
For example, you can put 35% of your salary in your checking account, 20% in your spending account, 20% in your emergency fund, and 15% in your second savings account.
By splitting your paycheck before it reaches your bank account, you won’t be tempted to spend money you don’t have. You’ll also be constantly working towards your savings goals without even thinking about it.
To divide it before you get it, you will need to do the math first. Figure out how much you are putting on all of your bills each month, what you need in an emergency fund, how much you will need for a big purchase, and how much you have left.
If your employer can’t split your paycheck for you, Aliche said there’s a simple solution: have them deposit the full paycheck into your checking account. Then you can configure the transfers yourself. Your bank probably has a tool to set up recurring transfers every time you get paid so you don’t have to remember it every time.
Aliche said this system of four bank accounts is an efficient and effortless way to budget.