3 Accounts Method
For years, I’ve tried to come up with a normal and sane way to manage money that didn’t involve complicated technical solutions (usually with a high price tag…I’m trying to save money!). I’ve tried everything. YNAB, Mint, GNUCash and everything in between.
Finally I settled on the 3 Accounts Method of my own design.
Its simple. It is almost set it and forget it. And It automatically helps you fulfill the parallel goals of paying down debt and building savings.
Never move money. Never wonder if you have enough for your bills. Never worry about your savings. Never worry if you’re going to make it to next pay day.
Why 3 Accounts?
Partially necessity.
If I have money, I’ll spend it. Not because I want to be broke, but seeing the money in the account means it exists. If it exists, I can spend it.
Prior to the 3 Accounts Method, I was keeping all of my money in one account and tracking my budget with apps like YNAB.
Even though YNAB would say I was out of money for the month, my bank account said different.
Plus there was the annoying responsibility of sitting down every day or week, or God forbid, once a month and trying to itemize all the transactions I had made into random categories, etc…
Finally, enough was enough. And while talking it over with my wife one night, I said, I think I have an idea about how to fix this.
How does it work?
Simple! We create three accounts with our bank and link them to 3 separate direct deposits for our salary.
Account 1 is affectionately known as the Bill Pay account.
Account 2 is the Savings Account.
Account 3 is Fun Money.
Each account gets a certain allotment of money each month. Accounts 1 & 2 are for exactly what they sound like, while Account 3 is used until its empty. No fun money? No fun.
It can’t be that simple
Well, it’s not quite that simple. But lets get into it.
Account 1 requires a little setup. You’re going to have to configure auto-draft for all your bills from this account. Remember, we’re shooting for almost no overhead after initial setup.
Why? Because we’re lazy and we know that if it’s not automated, we won’t do it.
Account 2 is just a standard savings account. Try and find one that offers a higher interest rate.
Account 3 is the one you’re going to link to your Amazon, your DoorDash, keep in your Apple/GPay, etc… This is the money we’re going to spend guilt free and without checking our accounts, because we know our bills are paid, we have some savings, and we can do so.
Believe Me? Then Lets Get Started
Step 1: Tech
Make sure your HR software is going to support you in this. If not, you’ll have a little more overhead, and you may even fail.
However, I’ve not worked for a company in a long time that didn’t let me set up multiple direct deposits for pay day based on dollar amounts, percentages, or both.
Step 2: Know Your Bills
Get a handle on your bills. I prefer to use a Google Sheets for this, but you can start on Pen and Paper and work your way onto digits if that’s what you prefer.
- Get a list of all recurring bills and their due dates, without a standing balance. (Utilities, Subscriptions, things where there is no principle balance.)
- Get a list of all Debts, their due dates, their current balance, and their interest rates.
- Get the average of each bill over the last 12-24 months. The more data you can pull, the better.
- Arrange the bills on your spreadsheet by the following columns. Recurring or Balance, Due Date, Balance Remaining, Monthly Due, Actual Paid
- Sort this list by Recurring/Balance, then Due Date.
- Add up your total bills per month. For our example, we’ll say you have $1800 in bills a month:
- $400 in utilities
- $1400 in balanced bills
- To help cover fluctuations in utilities and such, we’ll take our Recurring non-balanced bills and add a 10% buffer, (in our example, $40.)
- Great, now we have our first number! In order to pay our bills and absorb any fluctuations, we’ll need to put 440 + 1400 into our bill account each month!
We’re almost done.
Now we just take the average pay we expect month to month (this is especially easy if you’re salaried, or always work 40hrs, etc…) and subtract the $1840.
- For the next two numbers, the amount to Savings and Fun Money, we divided the remainder by a number our choosing. Our family does 50/50. You can move this ratio to your choosing.
Step 3: Set Up the Direct Deposits
Now that we have our numbers, we’ll do a little math and set up our direct deposits.
First we’ll come up with the amount of money we’re going to need in a year. (Monthly Bills * 12) Then we’ll divide that number by 24 (assuming you’re paid every two weeks.)
Note: You probably get 26 pay checks a year, but lets ignore those. This will just result in more savings and extra fun money!
Once we’ve divided by 24, we know how much money needs to go into direct deposit each pay check. Subtract that number from what’s left of your average paycheck and split it between Savings and Fun Money using the ratio you decided in the previous step.
Let’s Put It All Together
Twice a month we’ll be paid $3000 after taxes.
Our check will be split into:
- $920 into Bill Pay
- $1040 into Savings
- $1040 into Fun Money
If you wanted a formula, it’d look something like this.
- Account 1: (Yearly Total Bills + 10%)/24
- Account 2: (Yearly Pay - Account 1) / 2
- Account 3: (Yearly Pay - Account 1 - Account 2)
And that’s it, you’re now paying all your bills, you’re building savings, and you have play money.
But what now?
Well, there’s a couple of things you need to do.
Every month, my wife and I set down, and look at the bill pay account. Since the only thing coming out of the bill pay account is the bills, there are less than 25 transactions. That makes it pretty quick to make sure that (A) everything came out, and (B) the amounts were within the 10% extra you allow. (We cheat on this and have a formula in the column next to “Actual Paid” that takes the monthly and divides it by the total paid. If its >10% it turns red.)
Objections
But what if I want to take money out of savings?
Good. Do it.
But what if I run out of Fun Money?
Then stop spending. Or decide if its worth blowing your savings.
But there’s a bunch of extra money in my bill pay account each month!
Good, that’s a feature. In ~10 months you’ll have an entire extra months worth of cash on hand to cover your bills.
But I paid off something.
Great! Don’t touch that money. Look at those principles and interest rates and put that money into a different principled debt (a la Dave Ramsey’s Debt Snowball). If you’re out of principled debts, consider putting it into savings, a 401k, add it to your savings, or blow it!
But I don’t know what 401k to do.
That’s OK, check out this reddit flowchart from r/PersonalFinance to help you get your finances under control.
But I only have a little Fun Money each month!
Yep, you’s broke. Pay off some debts and you’ll have more money!