Exchange your savings account for a spending account
By Byron Moore, posted October 30, 2017
By Byron Moore, posted October 30, 2017
Originally published in the News Star and the Shreveport Times on Sunday, October 29, 2017.
Question: I just got a significant raise in my income at work. My wife and I are not budget people. We’ve tried and failed every time. But we don’t want my extra income to just go to frivolous stuff. What’s the best way to make sure we save my increases in income?
Answer: Reverse the way you do your banking.
Right now, if you’re like most folks, you have your paycheck deposited into your checking account. From there you pay bills, make ATM withdrawals, spend using your debit card and generally drain the account to zero a few seconds before another deposit is made two weeks later.
You intend to save money. You promise each other that next time you’re going to cut back, eat out less, buy discount toilet paper and generally live the life of a monk. That way you can save some money at the end of the month.
Funny thing is, you’ve never met anyone who’s been successful saving money that way.
One way to tame the overspending habit is to step to the front of the line and spend money on yourself before you spend it on anything or anyone else. It’s called paying yourself first (a.k.a. saving money, but that sounds too boring).
Make it automatic. Instruct your bank to move a certain amount of money at the first of each pay period from your checking account to your savings account. Note that I said “at the first” of each pay period. Put yourself first in line to benefit from the fruit of your labors.
In your case, I will make a further recommendation.
Decide how much you want to spend. Talk with your wife about how much you both wish to spend each month. It sounds like you’ve already decided upon a number – the amount you were spending before you got your big raise.
Account magic. Next, at your bank, set up two checking accounts and one savings account. They can be new accounts or old accounts you simply repurpose.
The first checking account is to be called your “wealth coordination account,” or WCA. The second checking account is to be called your “spending account.” And the third is simply your savings account.
Next, instruct your employer to have your entire paycheck deposited into your WCA.
On the same day your payroll check is deposited to your WCA, have the bank set up an auto draft to move the pre-determined spending amount from your WCA to your spending account. That is the amount you and your spouse have determined you wish to spend that pay period. It isn’t a budget, because you aren’t making decisions about how the money is being spent. But you have definitely set a limit on what you will spend during that period of time.
What happens to the rest of the funds that were deposited into your WCA? These should also be automatically transferred into your savings account. Your goal should be to have as little money left in the WCA as your bank will allow each pay period, after the auto-transfers are made.
Tip: don’t manually make the transfers each time – have the bank do it automatically. Discipline is a character trait that can come and go. Auto-drafts are forever (or until you tell the bank to change them).
If you think you may cheat by regularly transferring funds from your savings to your spending account, move your savings account to another bank.
The result of setting up this system is a pre-determined amount of spending and savings, with funds automatically finding their way into the appropriate accounts, without you having to ever think about it.
As soon as you have an amount equal to six months income in your savings account, you can start directing funds into longer-term investments.
Set up your automatic spending and savings system and let it work its magic.
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