This is a simple method designed to help people build their savings. Not only is it easy to follow, but it is also adaptable and applicable to all income levels. There are many reasons why you should have 4 bank accounts. However, the most obvious is that it is an easy way to help you gain control of your finances and your future.
What Is the 4 Bank Accounts System?
1. A Checking Account to Pay the Bills
Your first account should be a checking account to cover your basic living necessities. It is also the one that you should deposit your paycheck into if your employer cannot split it between multiple accounts.
The money that you put into this account should only be used to pay your recurring monthly bills. This includes housing fees (mortgage or rent), utilities, transportation, insurance, cell phone, groceries, etc. You should figure out the exact figure by tallying up your bills and ensuring you leave enough in the account to cover all your living expenses. Don’t forget to include payments that happen at less frequent intervals as well, such as property taxes.
Depositing your money in this account first guarantees that the money will be there, ready to use when bills come due. You can also automate payments to avoid late penalties as well. Since this checking account should only be used for bills, you won’t need a debit card for it. Not having one will help you avoid the temptation to use the funds for other things.
2. A Checking Account for All Your Other Expenses
Your second checking account will pay for everything else, like entertainment costs, shopping trips, gifts, and small splurges. Look at this account as spending for things you want, but don’t need. You’ll want a debit card for this account since this will be your primary expense account.
3. A Savings Account for Emergencies
Everyone needs a rainy day fund for life’s expenses that you can’t plan for such as car repairs, medical bills, or unemployment. Therefore, you should set aside money every month to create a safety net. This will help reduce the financial impact of large, unexpected expenses down the line. Experts suggest keeping a fund that could cover three to six months’ worth of expenses. However, this money is only intended for emergencies. So, you shouldn’t touch the account until you need it.
4. A Savings Account for Financial Goals
Your last bank account should be a savings account that is specifically dedicated for larger purchases like a car, a down payment on a house, or a vacation. You may view this as a savings account for your long-term desires. Or, you could use it as a retirement account. Either way, it helps you build savings for the future. Depending on how ambitious your savings goals are, you may want to create separate accounts for each one.
7 Reasons Why You Should Have 4 Bank Accounts
1. It forces you to look at your monthly expenses and create a budget.
Shockingly, many people have never learned how to create and live on a budget. However, setting up these different accounts forces you to categorize your expenses and calculate a figure of how much you spend each month. The 4 Bank Accounts System is an easy way to correct any imbalances and establish your financial goals.
2. The 4 Bank Accounts System prioritizes your expenses.
As you calculate your expenses, you must look at each one and decide which account it goes into. While you go through this process, you also qualify each item as a necessary or non-essential living expense. If you aren’t reaching your savings goals fast enough, it will also help you decide which ones you can do without to get there quicker.
3. Having a dedicated account ensures that your bills get paid first.
Since your account for living expenses is the first one to get funded, you never have to worry about running out of money at the end of the month. And, there is no risk of having your utilities turned off or not being able to afford groceries. If you set up automated payments, it helps you avoid late fees as well.
4. It will give you a clear picture of your spending habits.
One of the top reasons why you should have 4 bank accounts is because it highlights your spending habits. It neatly divides your finances into categories and allows you to see how much you spend each month on non-essential things. The process can also show you areas where you can reduce spending and help you live below your means.
5. Multiple bank accounts make it harder to spend money set aside for other goals.
You are less likely to make withdrawals or use an account that you don’t have a debit card for. So, it’s easier to resist temptation since the money is out of reach. Additionally, it makes you think about what you are spending your money on. The truth is that most people are unlikely to go to the trouble of transferring money for impulse buys. Therefore, it helps you spend money on things you don’t need.
6. You consistently work towards your financial goals without even thinking about it.
When you deposit the money directly into your accounts, you create the habit of putting your financial goals first. And, you don’t have the chance to spend it. Furthermore, compounding interest accelerates your savings goals even more.
You can simplify it even more if your employer can deposit your paycheck into multiple accounts. Then, your savings plan can become completely automated.
7. It teaches you how to manage your money.
The sad truth is that many of us never received a proper financial education. This is a contributing factor for why so many people struggle to save and get out of debt. One of the best reasons you should have 4 bank accounts is that it teaches you the fundamentals of saving money. Not only is the system is easy to understand, but it will also quickly establish good savings habits.
The Bottom Line
People have thought up tons of challenges and systems to help people save money. However, the 4 Bank Accounts System is one of the simplest and most straightforward that I have encountered. But, the system only works if you remain consistent. Whichever method you will stick with is the best one for you.
Read More
- The Biggest Lies About Growing Wealth
- The Best Retirement Accounts to Start Saving
- 5 Personal Finance Apps to Help You Save Money
Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.
I like the idea of having a “fun money” account. Funny, I have probably 10 different bank accounts along the lines you discussed, but I’ve always handled my fun money more informally (but still subject to a strict limit). It would be a better idea to see it separately, in black and white.
I found that I had similar accounts already, but this system helped me formalize them. Like you said, seeing it in black and white made it simpler and showed me some areas where I could be more budget-conscious and save more each month.
This is good advice. Separate the emergency fund another savings so there is not temptation to spend it.
Agreed! That way, I won’t touch it until there is an actual emergency.
Multiple Bank accounts for anything you eant to save for is awesome!. I have 5 accounts.
I agree, it helps me stay hyper-focused on a single goal.