The Only 4 Accounts You Need
Money is like oxygen. We all need it to survive. But with the proper cash flow plan, we can not only survive but thrive.
Money Management is Hard for Most People
I grew up with a single mother who had to earn every penny. I still remember the run down trailer we lived in next to corn field in Indiana and my bedroom with a sheet hanging where a door should have been. We didn’t come from money and so managing money was a real challenge for me growing up. Fortunately, I’ve learned a few things since high school about money management and this article is going to share my 4 bank account system.
This 4 account system has ensured that my family and I don’t have to stress about finances when the economy gets tough or my wife or I face a layoff.
With this system:
You’ll never accidentally run out of money
You’ll always have the money to pay taxes and surprise bills (like that car battery that just died)
You’ll always have money to cover your expenses
You’ll know how much money you can actually spend
You’ll have cash to invest which will set you up for financial peace
The 4 Accounts You’ll Need
Checking Account - Blue Beaker
This is the account where all of money flows into and out form. Your paycheck is deposited here, your sales from postmark on all those old clothes - all of it. Your bills are paid from this account. When this account reaches a predetermined amount, I like to keep two times my monthly expenses, any additional cash overflows into the savings and spending accounts.
Saving Account - Yellow Beaker
Fifty percent of the overflow from your checking goes into the savings account. Think of this as your reserve fund. When this account reaches a predetermined amount, I like to keep six times my monthly expenses, any additional cash is scraped off the top and put into the investment holding account. This account is your safety net.
Investment Holding Account - Red Beaker
When your savings account exceeds your threshold of six times your monthly expenses, scrape money off the top and put it into this account. This is not your personal fun money, but to use to buy investments that make you money and help diversity your revenue. You could fund an IRA, buy life insurance, buy stocks, or use it to start a side hustle. The point is that you diversify your income streams beyond your paycheck.
Spending Account - White (empty) Beaker
Life in moderation is a life worth living. This means you still need money to treat yourself to that Starbucks coffee if that’s what makes you happy in the morning. You don’t need six months of savings before you pamper yourself a little bit. When your checking account exceeds two times your monthly expenses, fifty percent should flow into this account. Some people treat their cash on hand as this account. This is not money to pay your bills, but money you can spend however you want. This is your vacation fund, your coffee budget, the money you use to buy those new golf clubs, or whatever brings you joy.
In Summary
Keep 4 accounts at all times
When your checking account reaches two times your monthly expenses, move 50% into your savings and 50% into your spending account
When your savings account reaches six times your monthly expenses, scrape the extra money off the top and put it in your investment holding account to diversify your income streams