It’s common knowledge, at least in the US, that you should have a bank account to keep your money somewhere safe and secure. Having multiple bank accounts can help you keep things separate, making it easier to keep track of your finances. Today, as more people work online and get paid by direct deposit or a service like PayPal, bank accounts are more essential than ever.
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Even after opening your first bank account, you can probably still improve your overall banking strategy. The digital age has brought us high-yield online savings accounts, allowing people to store their savings in a separate account that is isolated from their day-to-day expenses.
Many experts recommend going even further. Why not have three or even four bank accounts? If you’re familiar with the budget envelope method, it’s sort of a variation of it. If you rarely use paper money these days, having multiple accounts allows you to separate your budget into different compartments, each serving their own purpose. Let’s examine.
Two accounts: must vs. should and could
If you can’t imagine having multiple bank accounts, or want to make it easier to get in, one way to do that is to have two accounts. Keep in mind that with this setup you should always have a separate third account for savings. But the idea here is to separate your necessary expenses from the more discretionary ones. By doing so, you can limit the amount you allow yourself to spend on things that are just wants.
“In this type of setup, you can deposit enough of your paycheck into your Musts to pay your monthly bills, while the rest has more flexibility and goes into a second account,” says Jay Zigmont, CFP and founder of Learn, Live, Plan.
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Yours, mine and ours
If you have a spouse or partner, it can be difficult to know if your finances should be combined or if you should just separate them. But if you don’t like the idea of keeping everything totally combined or completely separate, there may be some common ground.
“For example, some couples have a financial approach according to yours, mine and ours,” Zigmont explains. “Each person has their own account for their personal expenses, with a common account for everything else.” This makes sense, especially since you likely have several ongoing expenses, like rent or mortgage, utilities, etc.
Four account strategy
If you’re up for something a little more complex, but still manageable, you might want to consider a four-account strategy. With this setup, you will have separate accounts for the following: Essentials, Lifestyle, Savings, and Savings Goal.
1. The essentials
Essentials are the things we mentioned earlier — those monthly expenses that don’t change, like rent or a mortgage, car payments, insurance, and so on. on the balance to meet those expenses,” says Anna-Sofia Coulson, digital marketing manager at Pave.
Coulson notes that you shouldn’t use this account for anything else. Anything that isn’t a regular monthly expense goes to the lifestyle account.
Your lifestyle account covers everything that isn’t a regular monthly expense. Therefore, these expenses will be more variable and are sometimes referred to as “entertainment” or “for pleasure” expenses. “Use it to fund weekend entertainment and restaurant meals or those pilates classes,” says Coulson. “Since this account is primarily for spending, feel free to attach a debit card to the account for day-to-day use.”
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While it can be tempting to allocate all the money not in your Essentials account to your Lifestyle account, it’s also important to build up your savings. In fact, you can even have two savings accounts, the first being for short-term savings or emergencies. “This money should only be touched in the event of an unforeseen emergency, such as the loss of a job or a car breakdown – this account is not for entertainment purposes,” Coulson says.
4. Savings on Lenses
The first savings account is meant to cover expenses in a major pinch. But it can get really complicated if you use the same savings account for something you eventually want to buy. “This account will hold money for your personal purposes, such as buying a car, a house, or just flying around the world or paying for your wedding,” Coulson says.
The difference here is that these are things you know you want to buy eventually, but they are expensive. It’s different from your emergency fund, which covers unexpected short-term expenses. And your bank can even help you with those accounts, according to Coulson. “Depending on your bank, you may even be able to take advantage of certain savings account benefits to save faster for your personal goals or track how much money you have left to save.”
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