Before I truly understood the power of automating my finances, my bank account was a hectic and chaotic place.
Let me explain.
Every two weeks my paycheck was direct deposited into my one checking account. That account served as a one-stop shop for all my finances. I used it to pay my monthly bills, pay for food and other variable expenses, and of course, for spending money.
As for savings, I tried to move a percentage of my earnings into a separate savings account each month, although there were plenty of months that did not happen.
That was my system, if you could call it one.
The problem was, with no set budget, I didn’t have a clear understanding of how much money I was spending outside of the big ticket expenses like rent.
I spent relatively freely and when my checking account was drawn down, I replenished it by moving a couple hundred bucks over from my savings. I didn’t like doing this – in fact it felt like I was cheating or doing something wrong – but I rationalized that it was what I had to do to keep my bills paid.
Luckily, I’ve all but eliminated these bad financial habits.
As I learned more about budgeting and the power of automating my savings, I developed a system that helps me separate the money I need to pay my bills every month from the money I spend on variable expenses, like eating out and buying new clothes.
Using multiple bank accounts – and some simple math – I’m able to separate my spending money from the money I know I need every month. This doesn’t just help me stay on budget (or close to it), it gives me piece of mind. I know that I’ll have enough money each month to cover my fixed expenses, which gives me more confidence to make strategic financial decisions, like investing and saving.
Here’s how to do it:
Step 1: Add up your monthly expenses
First, you need to figure out how much money in total you devote to these fixed, monthly expenses. List and add up all your monthly bills, from your rent or mortgage to your car payments and student loans.
Don’t forget your utility bills, even though these may vary from month to month. I’ve found it beneficial to allocate a little extra for utilities in case my power bill is exceedingly high one month. My girlfriend and I combine to pay between $180 and $200 for cable, internet, and power, but I set aside $100 per month and consider them a fixed expense.
Step 2: How much do your monthly expenses add up to each year?
Now, simply multiply your fixed, monthly expenses by 12 to determine how much these bills add up to over a year.
If you spend $2,500 per month on fixed expenses, this number will be $30,000.
Step 3: Set aside money every pay period
Now, we have to figure out how much money to set aside every time we get paid to be able to cover these fixed expenses every month.
But it’s easy math. Just divide the total from step 2 by the number of times you get paid per year. If you get paid every week, divide by 52. If it’s every other week, like me, divide by 26.
Using the example from step 2, I would divide $30,000 by 26. In this scenario I’ll need to aside $1,153.84 from each paycheck to cover my monthly expenses.
Step 4: Set up a checking account and direct deposit
The final and all-important step is two-fold. You’ll need to set up a separate checking account that you will use only to pay your monthly bills. Think of this as a business account, separate from the rest of your finances.
Then, set up direct deposit with your employer and have the amount from step 3 sent directly to this new checking account every pay cycle. For even greater piece of mind, set up automatic payments for recurring bill payments.
If you’re like me and you struggle with your spending habits, this system will help you narrow your focus and address those concerns. By separating the money you need to pay monthly bills from the cash you use for everything else, you will have a clearer and more defined picture of your finances as a whole.
Patrick Villanova 