There are hundreds or thousands of ways to budget your money. And it’s important to find the perfect method that works for you. Everyone is looking for the best trick for budgeting success. In this post, what I’m about to share with you now, is one of them. With that one thing, you need to prepare yourself to be successful with budgeting and control your spending.
There is no such thing as rocket science. It’s pretty simple, but why most of us have never even thought about it is because we did banking in a certain way. But the truth is that this traditional way of banking doesn’t help us with our budgeting; it actually makes things difficult.
So, what’s the trick for this? It uses multiple bank accounts for budgeting.
That’s it. Did secret reveal?
But how many accounts should you open and what should you save for? Why are multiple bank accounts the secret to budgeting?
We will discuss all of these questions in the rest of this article.
Let’s start with the simple question: why do we need to use multiple bank accounts for budgeting?
Why Do We Need to Use Multiple Bank Accounts for The Budgeting?
If you have multiple bank accounts, you can divide your money into different buckets. You can give each account a nickname so you can have a clear idea of how much credit you have on each account and what that credit will be used for.
For example, you set up different accounts for vacation and home repair. So if you look straight into your account, you know you have $ 758 for the vacation and $ 597 for the repair fund. There is no confusion of these amounts or you may not get confused about what each individual dollar is for.
You might think having multiple accounts would complicate things, but believe me, it really makes things much easier!
With traditional banking, you have a checking account and a savings account, and all of your money is pooled together. You may have a written list of what money is for what purpose, but with more money and over time it can get tangled and confused, and then whoops, you have just spent your home repair money on your weekend away at the beach, oh and your washing machine just broke.
When your money is split, it is extremely obvious what each dollar is for. No confusion and no mistakes.
What Are the 5 Major Benefits of Having Multiple Bank Accounts For budgeting?
When it comes to budgeting, we talk a lot about saving expenses, managing impulse spend, and living within your means. Don’t get me wrong, these are all good things, but most of the time the conversation ends here. This is also why most people have a disorganized pile of savings in a single account.
If you really want to maximize your budget and live an organized financial life, you need to do more than organize your expenses, you need to organize your savings.
In this next section, I’ll pick up the conversation where it usually ends.
Let’s talk about multiple bank accounts and the beneficial role they can play in your financial life. especially budgeting.
1. Staying Focused and Engaged
For most people, saving money is a fairly passive activity. You put it in a single account and try not to think about it. However, if you want to be in control of your money and manage it almost perfectly, you should actively participate in the savings process.
This is why it makes so much sense when budgeting to split your savings across multiple accounts. It forces you to divide your money into different categories and give individual attention to each of your financial goals.
Also, one of the most important things you can do to achieve a goal or build a good habit is to make it obvious. In other words, if you want to achieve a goal, you should set up a series of reminders to keep track of the goal.
This is why it is so powerful to have multiple bank accounts. When you log into your bank account and see an account for each of your main goals, it’s a constant – obvious – reminder to focus on each of those goals.
2. Improving Your Financial Organization.
When it comes to personal finances, disorganization is a recipe for financial disaster.
So, one of the first and most important things you can do to improve your financial situation is to get organized. And as I mentioned earlier, I’m not just talking about organizing your bills and expenses. You should also organize your savings by dividing your money between different accounts.
For example, let’s say you’re saving for a car and a vacation at the same time. If you simply pile all of the money into one account, the lines between the individual savings goals become a little blurred. And when that happens, it’s a bit too easy to spend your auto savings on an overly extravagant vacation. (Or vice versa.) Not good.
Just as you organize your expenses by dividing them into different categories, you should organize your savings across multiple accounts.
3. Protecting Your Emergency Fund.
Saving an emergency fund is not easy. It takes time and care. And if we’re being completely honest, staring at a pile of cash big enough to cover your expenses for six months can be difficult.
But your emergency fund is there for a reason, and it’s a big no to dive into. So you should separate it from your other savings. And in all honesty, you should keep it in an account with another bank.
One of the top reasons you should have multiple bank accounts is to protect your emergency savings. In fact, you should have at least two savings accounts: one for your emergency fund and another for all of your other savings.
4. Less Guilt.
If you’re like me, saving up is a painful experience. And when you have a single savings account, that debt only gets worse. Why? Because you are essentially pulling money out of your emergency fund even if you are subtracting savings that go beyond emergency saving.
Well, I think your emergency fund should be untouchable, except in the event of an emergency, of course. On the other hand, if you are saving up for a car, it is perfectly acceptable to use the money to pay for a car.
Because of this, if you split your savings across multiple accounts, you can withdraw debt-free money from a savings account other than your emergency fund.
5. Tracking Your Progress.
For those of you with more than one long-term financial goal, using multiple savings accounts is the easiest way to track your progress on all of them.
I mean, who would want to pull out a calculator or type numbers into a spreadsheet to break large savings account into multiple goals? What a pain Wouldn’t you rather just log into your bank account and instantly know how much money you saved for each goal? This is what happens when you use multiple bank accounts for saving.
Tracking your progress in regard to all your savings goals is extremely simple when you have a savings account for each one.
Tracking your progress on all of your saving goals is easy when you have bank accounts for each.
How Many Savings Accounts Should I Have for budgeting?
Okay, we’ve discussed the benefit of having multiple savings accounts for budgeting, but how many accounts should you have? Is there a point where it becomes overdone?
Sure. I mean if you are saving for a small, one-time expense, it doesn’t make sense to open a savings account. Rather, you should open a savings account for a long-term or permanent savings goal.
Well, that can mean something different for everyone. But in general, there are a few savings accounts that we think everyone should consider.
1. Emergency Fund
I feel like I never stop talking about saving an emergency fund. But frankly, it’s just as important. I don’t care how old you are or how much money you make, bad things can happen to anyone and you need to be financially prepared for them.
Your emergency fund should be the very first savings account you open and it should have enough cash to support you and your family for three to six months. In addition, you should keep it in a money market or savings account that earns between 1% and 2%.
If you don’t have an emergency fund, this should be your top priority.
2. Medical Fund
Medical expenses are not always emergencies. Hence, it’s a good idea to have a savings account with at least a few hundred dollars to cover things like routine doctor visits and prescriptions.
You shouldn’t have to reach into your emergency fund every time you catch the flu. So open a savings account and put up a few hundred dollars for the usual medical expenses.
3. Automotive Fund
One thing I know about cars is that they need constant maintenance in order to function properly for a long time. Also, expenses like registration, new tires, oil changes, and new brakes can get quite expensive. However, they are not emergencies.
Expenses for the normal wear and tear of your vehicle shouldn’t come from your emergency fund, which is why it makes sense to open a savings account for auto expenses.
That said, if you unexpectedly burst a tire on a four-wheel drive car (meaning you’ll need to buy a brand-new set of four) or your car breaks down, you can use your emergency fund to get back on the road
A car fund is there to help you save and pay for the predictable costs associated with owning a car. In addition, if you are saving on buying a new car, it is a good idea to keep the money in its own savings account. So, you can pay cash when buying a car.
4. Vacation Fund
Everyone needs a vacation now and then. But hotels and flights can cost a pretty penny, which is why you should have a vacation savings account.
Think about it, if you put a few hundred dollars into a savings account (or paycheck) every month, you could have a pretty great vacation every six months. This life is too short to just work all the time.
Set up yourself with a vacation fund and enjoy the wonders this world has to offer.
5. Home Savings Fund
Homeownership costs are like automotive expenses on steroids. So if you own a home, be sure to set up a savings account for it.
Whether you’re paying for seasonal expenses like plants for a garden, a new snow blower or mower, or larger expenses like a new roof, you don’t want to reach into your emergency funds or have to go into debt to pay them off.
If you set up a household spending savings account, you won’t regret it.
6. Pet Savings Fund
With the exception of a goldfish in a small round bowl, pets get quite expensive. So, if you’re a canine or cat person, or any other type of animal, preparing for random pet and veterinarian bills should be high on your priority list.
Additionally, pet expenses shouldn’t come from your emergency fund. This is to protect you and your [human] family from large, unexpected expenses. And let’s face it, the only thing predictable about pets is that they are going to be unpredictable.
So, prepare for the unpredictable by opening a pet spending savings account and depositing consistently.
How to use multiple bank accounts for budgeting?
In order to budget with multiple bank accounts, you need to make sure that you are implementing this strategy effectively. First, make sure juggling multiple accounts doesn’t distract you from your top financial priorities. For example, if you don’t save enough of your income for retirement, you can’t look any better off opening savings accounts for travel and a new car.
“A new car sounds like a lot more fun than retirement – and is more accessible in the short term,”. But will it help you retire? Probably not. In order not to neglect the most important aspects of your financial life, it is advisable to sit down with a financial planner to make sure you are on track with retirement before saving money on a vacation or other destination.
Once you’re on the right track with your primary financial goals, opening multiple bank accounts can only help. However, it can be helpful to start small so that you don’t get overwhelmed.
Start with a goal like an emergency savings account – and save the minimum amount you need. Then go on with the next one. Trying to save up for too many things at the same time could prevent you from turning any of them into reality.
You can also save yourself some headaches by only considering savings accounts that are easy to open and easier to manage. Online savings accounts are a great way to keep saving money without the hassle of driving to a physical bank.
Other Budgeting Methods to Consider
If maintaining several bank accounts seems overwhelming, here are other options to try:
1. Envelope budgeting.
This is an option for budgeters who like a practical approach. You decide on a number of budgeting categories and assign each one an envelope. Then, for each pay period, you will split your cash earnings across all envelopes according to the amounts you spend in each category.
If you are spending all of your available cash in one envelope, we do not recommend pulling from another envelope. You simply have to wait until the next payment period to continue spending in this category.
2. The 50/30/20 budget.
This method divides your income into necessities (which you will spend no more than 50% of your income on), needs (30%), and savings and debt payments (20%). This can help you decide how much to spend in each category, regardless of what additional budgeting strategies you choose, such as multiple accounts or envelopes.
3. Zero-based budgeting.
The zero-based budgeting method sorts every dollar you make into a category. But unlike envelope budgeting, you can move money between categories if necessary. You can use this along with budgeting across multiple accounts by splitting every dollar you earn into separate accounts so you can easily settle all of your money every month.