We want to share the process we use to keep our cash designated for budget items in the proper place. This system is best used when you are trying to get out of debt. If you are already out of debt, other bank accounts may be added for specific goals (e.g. saving up to remodel kitchen, saving for a down payment on a house or vehicle, etc.). After you receive one of American Wealth Project’s Budget Blueprints, we recommend you implement the 3 bank account system for your cash as detailed below. The first section will be a Bird’s Eye Overview with more details to follow in section two.
Your regular checking account where most deposits and payments occur. This should just be a free checking account. If you can get an interest-bearing account, that is a plus but it is not the focal point. You should also try to avoid minimum balance requirements or other unnecessary bank requirements that may end up charging you fees.
Your “recurring non-monthly checking account.” Again you just want a basic account that won’t charge you fees for ease of access or regular transactions.
Your last bank account should be your emergency fund account. This should be a high-yield savings account. Currently, savings accounts at Ally or other online bank accounts provide >1% interest and have no fees so there are some good options out there for your emergency fund.
Now, let’s look at how to we should use these accounts.
The regular checking account will be the account you use to pay your utilities, groceries and other normal recurring monthly expenses. When you use our budgeting system, you will know general categories of expenses to be paid from this account. The end of month balance will be relatively low since you are using your extra cash to pay down debt and move money to your other accounts to follow your plan.
Recurring non-monthly checking
The recurring non-monthly checking account will be used to pay expenses like car insurance, municipal fees, etc. Again, our budgeting system will teach you over time to know what types of expenses to pay from this account. You should set up an auto draft, from your regular checking account, to transfer the amount specified in your budget to cover these expenses as they come due.
Example - let’s say you have only 2 non-monthly recurring expenses which include car insurance for $450 every 6 months and your yearly eye-doctor exam for $300 every 12 months. In this situation, we would want you to set up an auto draft from your checking account to your recurring non-monthly checking account for $100 ($450/6 months = $75 per month; $300/12 months = $25 per month). This account is used mostly for large expenses that could significantly bust your budget if you didn’t account for them over several months.
Reminder: When you start this system you have to adjust the amounts based on the number of months before these payments come due. When these expenses come due, you should have the money in your recurring-non monthly checking account to pay them and you can continue paying down your debt without interruption.
Emergency savings account
The emergency savings account is pretty straight-forward. You set aside an emergency fund of 3-6 months of expenses in a separate account, not to be touched unless a real emergency occurs. This is, in effect, your self-funded insurance policy in case of a lost job, emergency room visit, significant vehicle repairs or other type of emergency that you can not cash flow in your normal monthly budget.