Bank Accounts and Budgeting

Yep, this is about bank accounts. I’m going to take a stab in the dark here and assume that anyone reading this has one of these. For most of us, it’s the place where money goes in and, unfortunately, money comes out.

You can log in to your bank account online, where you can view your balance, pay bills, set up standing orders. Apart from withdrawing physical cash, you can pretty much do anything you’d ever need your bank account for online. It amazes me that I still see people queuing up to do their everyday banking in a high street branch. There are some accounts that can only be accessed online, as well as, believe it or not, accounts that can only be managed over the phone or by post.

Bank accounts are, let’s face it, a pretty simple concept. Yet so many people simply aren’t able to manage theirs properly, seemingly stuck in a constant cycle of too much month at the end of the money.

Here’s what happens – we leave school / university, get jobs and begin to earn salaries paid into our bank accounts. We then use our salaries to pay for life, i.e. rent, bills, transport, mobile phone contracts, gym memberships, going out with friends etc, etc. Let’s say we’re paid monthly. Money goes in on the 1st of the month and life is good. There’s money in our pockets and we can do whatever we want without a care in the world. We then arrive at the 3rd week of our latest salary injection and decide it’s time to check our balance – what do we find? To our horror we discover that suddenly, as if unbeknown to us, we’ve already spend the majority of our wages and have to wait another 2 weeks until we’re topped up again. Life comes crashing down. We look at our diaries and see upcoming plans that we can no longer fulfil and end up living as if poverty stricken until we’re paid again. This just seems like an utterly bonkers way to live, but I’m betting it’s an all too familiar story.

One major problem here is the lack of financial education for children growing up in the UK, which is another topic in itself. But really, there is a solution that works, which is so unbelievably simple I can’t believe nobody ever told me to do it.

Here’s the answer – Open 2 bank accounts: one for regular expenditure and one for spending. Revolutionary, I know. Honestly, I feel a little embarrassed even writing that people should do this, yet so many are struggling to make it to the end of the month for the simple reason that they have access to all of their money at once. In a consumer driven society, it really isn’t that surprising that people end up spending all their money before any more comes in.

You should have a list of all your current outgoings – if you don’t, go and write it now. Mortgage / rent payments, household bills, vehicle expenses, the cost of your commute, life insurance, gym membership, phone contract, subscriptions, charity donations – basically all your current financial commitments.

You should also include your monthly savings in this list. If you’re not already saving, now’s your chance to write down a number and simply forget about it.

Once you have your list, total these up. You’ll now have the magic number for your regular expenses. Think of this as the money you never had – it might help to arrange all of your regular expenses to leave your bank account on the same day; the day after payday perhaps. These should all be set up to come out of your Primary bank account, which should also be the account your salary is paid into.

Now that you’ve sorted your expenses and totalled these up, you’ll now have a number to take away from your monthly salary. The resulting figure is your spending money, and should go into a separate account to fund the stuff you like to do: Eating out, shopping, morning coffee, nights out, takeaways and general everyday spending. You can continue to do all of these things, safe in the knowledge that all of your other bills are taken care of by your primary account. I promise this will instantly make it easier to manage your regular income and expenditure.

For example, if you earn £2,000 per month and your regular expenditure comes to £1,000; you now have £1,000 to spend on whatever you want. Maybe break it down even further into a weekly budget of £250 a week or, if you’re like me and live for the weekend, go a step further and split it into weekday and weekend money. Why not even withdraw it as cash? Take out your weekday money on a Monday, make this last until Thursday and don’t draw any more out of your account until Friday when the fun starts.

I don’t believe there is a more fool-proof way of managing your everyday money and would urge everyone to do this. Even if you’re already good at managing your income and expenditure, there is no downside to doing this – it simply puts you in more control of your finances.

Separate your spending from your expenditure, and take away the burden of budgeting.