- Cash Flow
- How To
Why One Checking Account Wasn't Working 🥴
When I first started “adulting” I was managing all of my money out of 2 accounts: a checking account and savings account. I would get paid, spend cash and pay bills out of the same checking account, then transfer whatever was left in my savings account.
For a while it worked fine but as I added more expenses like car payments, subscriptions, tuition, etc… I was always trying to guesstimate how much I had left for savings and daily spending each week. Some weeks I had bigger bills, other weeks I would spend more cash. If those weeks happened to align I was basically broke or overspent.
My cash flow was all over the place so I started using a simple budget but something was still missing. I knew how much I was spending on bills but I was never truly certain what my available balance was. Auto-payments and pending transactions kept my account constantly in flux especially over weekends and holidays. I couldn't control exactly when these payments would be cleared and withdrawn. My goal was to be able to look at my bank account balance and see exactly how much was left after my usual expenses.
Separating My Bills From Daily Cash Spending 🤔
The simplest solution to reduce the flux of pending transactions and auto-payments was to separate my bills into a secondary checking account. All bills and auto-payments come out of the secondary account, while any income and direct deposits go into my primary checking account.
The secondary checking account acts as a holding spot for payments and pending transactions, separate from your flexible cash spending and debit card purchases. It's the personal finance equivalent of "accounts payable".
This has some key benefits:
- Reinforces proactive habits, on-time bill pay and reduces fees.
- Money can be set aside independently of an auto-payment or be scheduled ahead of time.
- Pending transactions won't constantly fluctuate in the same account you use for daily spending, preventing surprise overdrafts.
- There will always be an accurate balance for the primary account that is available for daily spending.
- Remaining cash from the previous weeks budget in the primary account can easily "rollover" if you didn't use it.
- Removes the stress of tracking when pending transactions are cleared and withdrawn.
My budget already tells me how much my bills cost so I transfer that amount into the secondary account every payday before spending anything. Using online banking transfers happens instantly so I always know what my remaining balance is in the primary account. Now all of the major fluctuations in cash flow happen separately from the money I have left over in the primary account.
The thought process is: I don't care exactly when this bill will be withdrawn but I do know it will happen soon, so I'll put that money into my secondary account to be ready. This process allows me to be proactive with my bills, keep them on auto-pay and see an accurate balance of what's remaining in my primary checking account.
The idea came from sinking funds, except money flows in and out at the same rate all the time.
Maximizing My Savings and Spending Cash Freely 😸
Now that my bills and major financial priorities are taken care of I'm free to save and spend as I please. No need for keeping up with numerous budgeting categories or spending limits (unless you want to). Whatever is remaining in that primary account is the max you can use until the next payday. The only transactions coming out of the primary account are at ATM's, debit card purchases or online bank transfers. Unless you explicitly use the primary account in those ways the balance will not change.
How You Can Get Started:
- Open a second checking account at your current bank, preferably with no maintenance fees. It's important both checking accounts are within the same bank so transfers can be made instantly through online banking,
- Create a budget for your bills so you know exactly what they cost and can plan them around your paycheck.
- Start with one months worth of bills in the account as a cushion amount, this will cover any immediate large expenses like rent and balance out over time as you transfer in upcoming bill amounts.
- Update your direct deposit or auto-pay information to lineup with their respective checking accounts. All income and direct deposits go into the primary account, while bills and auto-payments come out of the secondary account. Tip: It may be easer to change information for 1 direct deposit than multiple bill-pay accounts.
- Transfer what your bills cost on payday from your primary account to your secondary account.
- Rinse and repeat step 5 each payday.
- Automate/schedule the transfers to your secondary account so you can set it and forget it.
- Avoid checking accounts or banks with maintenance fees when possible. I highly recommend looking into local credit unions or regional banks. Larger banks like Chase and Bank of America have trash banking options, often charge ridiculous fees and pay low interest yields.
- This method can also be used to meet savings goals as well: transfer money to your savings account on payday just like you would transfer your bills into the secondary account. Pay your purse first!
Other Uses For That Secondary Account:
- hold cash for a check payment
- hold cash for a credit card payment
- transferring cash to a different bank (external ACH Transfers)
- incremental cash savings towards large bills like rent or yearly expenses
Does this mean I'll have 2 debit cards?
Yes, I leave the secondary debit card at home and only keep my primary debit card for daily spending and ATM access. The secondary debit card isn't used as much except when bank accounts aren't a viable payment method, then you can use the secondary debit card so it keeps things separate.
My rent costs more than 1 paycheck, so how do I transfer that money on each pay day?
I like to breakdown larger expenses into proportions of my paycheck. For example, lets say your rent is $1,000 a month, that equals about $12,000 per year. If you're paid bi-weekly that means you'll recieve 26 paychecks per year. $12,000 a year for rent divided by 26 paychecks per year equals $461.54 each paycheck. Setting aside $461.54 every pay day will spread the cost evenly over time and ensure your rent is covered each month over the whole year.
What if some of my bill costs vary throughout the year?
Thats not uncommon, like utility bills and cloud services that are based on usage not a flat rate. In that case I usually over-estimate how much those bills will cost based on the previous year. If it ends up being less you can transfer the difference back into the primary account, if it's more than you should add the difference to keep the secondary account balanced.
Doesn't it take more effort to manage 2 checking accounts?
It certaintly takes a little getting used too but the benefits have completely outweighed any extra effort. Being able to schedule recurring transfers with online banking helps automate things as well. As you become more comfortable doing this you'll notice you can combine your bills into a single lump sum transfer amount every pay period. As long as you put in what comes out of the secondary account it's pretty easy to manage.
Why not just keep extra cash in your primary account at all times?
I tried this for a while, but I didn't like how ambiguos my cash balance was all the time. It also discouraged me from maximizing every dollar I earn. Could I be saving that extra cash? Investing that extra cash? Spending that extra cash? Now I can see exactly how much extra cash is left in real-time for me to use. I can spend my primary account down to $0.01 knowing that everything else has been accounted for.
Why can't I just do this with my existing savings account?
I don't recommend doing this for 2 main reasons:
- Savings accounts fall under a federal law called "Regulation D" which limits these accounts to 6 transactions per statement period. This can be easily exceeded depending on how many bills you have to pay, regardless of how much they actually cost.
- Bill pay transactions and auto-payments from your savings account can be denied by your bank depending on their withdrawal policies which may result in extra fees from your bank and/or bill payee.
Savings accounts were just not designed for this purpose. It also obscures what your true balance is in that savings account due to the fluctuating transactions, which is the problem we've been trying to solve in the first place.
This method may not work for everyone or bring you peace of mind like it did for me, this is personal finance after all. However, if your looking for a way to separate your bills and maximize the remaining cash you may want to try it out.