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Saturday, May 19, 2012

Separate Bank Accounts

One of the things that I always recommend to people is to have more than one bank account.  This is very different to having more than one credit card so don't get the two confused.

When I first started reading about personal finance management, I learnt the 10% rule. If you save 10% of your income, every time you get paid, you are on your road to wealth.  I  had every intention of doing this and more but for some reason, the money just would not stay in my account.  At the end of each pay cycle, the 10% wasn't there.  Or else, I would see my bank account increase over the course of a couple of months only to dive back down again when a bunch of bills all came in at once.

The solution was pretty simple but it took me many years to figure it out and to implement it.  It's all very well saying put this money aside, or save that, and when you are doing those things it is obvious how they are to be done.  It is not so obvious if you have never entertained the concept before.

So here's the step by step process:  Go to the bank and get them to open up a few more bank accounts for you.  I recommend having at least four.  If your credit card has a zero balance, then this can be one of the four.  Have your ATM card linked to only one of these, and the others only accessible via internet or phone banking.  They should not charge extra account keeping fees for the extra accounts and if they do, find a bank that doesn't.

Here's what they are for.  One will be for your investment funds or retirement.  One is for the bills that only come once in a while.  One is an emergency fund for unexpected bills like car accidents or theft etc.  This one can be your credit card if you don't regularly max it out.  The other account is your regular transaction account that your income goes into and regular bills such as groceries get paid from.

Now, on the day you get paid, put 10% of your income into the investment fund.  If this sounds unachievable, start with a smaller amount.  It is the habit that's important not the amount, so even if its just $5 per fortnight, get this one started.  You will find it easier to add to later.  Work out what the total of your irregular bills are for the year, divide by 52 and that's what you put in the second account for each week.  When these bills come in, do a transfer from this account to get them paid.  Put aside a little each pay for emergencies, so that if something comes up, you don't feel compelled to dip into your investment fund or money allocated for other purposes.  You should feel comfortable spending the rest of your pay in the regular way, knowing that you have saved money and that everything else is covered.  Remember to do your direct transfers on the day your pay goes in, otherwise you may find that you have run out of money before you get around to it.

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