In Taking Control of Your Money I mentioned that in order to make progress financially we need to automate where possible, but how exactly do you do that? Aside from automating bill payments through direct debits, is there anything else that can be done? For example, how can you organise your money to reduce the likelihood of overspending? What can you do to ensure sufficient funds remain in your account to service bill payments? These are just some of the queries I’ve heard in relation to managing money.
There are many ways people organise their money in order to manage their budget. For me multiple accounts are essential, at a minimum one for each of the following:
- Bill payments
- Other spend
Let’s tackle savings first, as I’m all about paying myself first :).If you would like to establish savings it is essential to have a dedicated savings account. This account keeps the funds out of the way until you are ready to put those funds to work (generating income for you). If you are managing savings in the same account as your bill payments or other spend, the odds are your savings will be sacrificed first when tempted with that unbudgeted take-away or night out. In short, separating your savings creates some barriers.
Next bill payments, the thought process behind this is that you leave a set amount each month (or however often you get paid) in this account to cover your bill payments. This is easy enough to determine for those relatively constant bill payments (e.g. mortgage/rent). For those bills where some fluctuation is expected, determine a figure based on past spend (if you have not been monitoring your spend now is a great time to start). If you have excess left over after bills have been paid, leave it there until it meets a certain value (e.g. £200), then transfer to savings ready to put to work. The aim is that this threshold is high enough that you aren’t moving money every two seconds, but low enough that you aren’t missing out on other key opportunities the money could be used for (aka opportunity cost).
Lastly, we come to the other spend. This is the money set aside for play (yes I do believe in setting some money aside for play!), whether that be going out for a meal/drinks, or something else fun. For me this is usually once or twice a month but this is an individual choice and should be aligned to your budget and financial goals. I don’t believe extreme budgeting is sustainable for any significant measure of time. For your budget to be successful it must be realistic! If not you will find your social habits leading you astray financially.
So what’s the point in all this???
Now to some this may seem like a lot of effort, but in this day and age of low interest rates I’m sure many of us have multiple accounts to benefit from the best rates on offer. The initial set up (researching, shortlisting and applying) may be a bit of a pain but look at it as short-term pain for long term gain. Once the system is in place, with your salary being paid into either your bill payment or other spend accounts and automated payments set up to fund your other accounts, it is then a case of tweaking (e.g. adjusting savings amount, adding a direct debit for a new bill, adjusting standing order amounts, etc). Your money will go where you’ve planned for it to go without much manual intervention – leaving you free to put your efforts to other things.
What system do you have in place to manage your money? Do you use multiple accounts or just one? What have been your biggest struggles in this area? What do you find works best for you?
PIN IT FOR LATER