The New Year is the perfect time to get your finances back in order. Budgeting is a tried-and-true method to track your expenses and avoid debt. However, many people struggle with traditional budgeting systems because they are inaccurate and difficult to follow. Our spending habits fluctuate from month to month, making budgeting difficult. On top of that, we tend to overestimate our self-discipline when making purchases. Many of us might get frustrated and give up on our budgets for these reasons. However, an alternative to the traditional budgeting system has shown to be more efficient: the Two Checking Account System.
The Two Checking Account System is simple. One checking account is for fixed expenses, and the other is for any additional money. Your fixed payments typically don't fluctuate very often, allowing you to predict how much you will spend on them with more accuracy. Money left over from this account either goes into your second checking account or an emergency savings account, which we will explore further below.
How Do You Get Started?
First off, consider naming the accounts; this helps keep us disciplined about our spending habits. Think about calling the fixed expenses something like "Bills" and the other account "General Expenses." It also helps to name your emergency fund too. Start automating the deposit into each account after you have the accounts set up and named. If it is automated, keeping up with your system is much more manageable.
There are a few ways to do this. You could direct deposit into each separate account, or you could direct deposit into your fixed expenses account and set up an automatic deduction into your discretionary account. Occasionally, you will have to check these accounts to ensure everything is in order. However, you will not have a fear of accidentally overdrawing your "fixed" expenses account and missing a payment.
While the idea might be simple, it is very effective for staying on budget. People tend to overspend, leaving them unable to cover must-pay bills. Having a separate account dedicated to those discretionary expenses allows you to make better choices about spending money on things you want.
Fixed Expenses
Fixed expenses tend to be recurring payments that you must pay to avoid late fees, service cancellations, dings to your credit, and any potential debt. The most common of these expenditures are rent/mortgage payments, utility bills, medical care costs, debt payments, childcare, or car insurance. These payments are essential for everyday life, so they must be paid off first before considering any other expenditures.
To understand how much money should be in this account, make a list of monthly, quarterly, and semi-annual fixed expenses. The next step would be calculating your deposits to maintain the necessary amount in the account each month to cover these bills. It may be wise to set up automatic payments for this account to guarantee that payments are never late.
Discretionary Account
This account is for any funds left over after your fixed expenses. You can use this account for non-essential purchases, such as entertainment or shopping. What you do with this fund is 100% up to you, so spend it wisely! Many people also use this account to pay for groceries and food. This is a preference, and you can budget your food expenses as a fixed cost or as a discretionary cost. However, it is recommended that you be extremely cautious not to overspend in this category since it rarely occurs as an automatic payment. Lastly, if you decide to incorporate an emergency fund into your budget, you will need to divide your leftover funds wisely.
Emergency Fund
As mentioned previously, it is wise to set aside funds in an emergency savings account. Having these funds will allow you to have more money on hand to cover any significant payments such as unexpected car repairs or medical bills that your other accounts will not cover.
Having two checking accounts and an emergency fund is an efficient strategy for staying on budget. A dedicated checking account for fixed expenses ensures that you pay your fixed costs, avoiding potential late fees. At the same time, a discretionary checking account will help you budget any additional charges. Finally, having an emergency fund will keep your finances in order if any unexpected expenses arise. Budgeting and opening a new checking account can be stressful. However, ALLIANCE is here to make the process quick and easy! If you are interested in opening a checking account at ALLIANCE, visit us online or stop by any of our branches.
