Today I want to share a simple system with you that I’ve used for managing my financial accounts for a very long time (over a decade!).
What I love about this is that it tells you exactly how much disposable income you have each month – it makes it really easy to make spending decisions and you never have to worry about paying the bills.
This system works whether you are an individual, or part of a couple sharing your money.
So here it is, in a nutshell:
You have two current accounts, one of which runs on autopilot, and the other from which you make your general purchases (food, coffee, designer clothes, gifts, whatever you feel you need).
Before you start you need the following:
1) Two current accounts that support direct debit payments.
2) A list of all your direct debits – every single bill that you pay monthly.
And this is what you do:
1) Your salary presumably already gets paid into your main current account.
2) From this account you set up a standing order to pay a fixed chunk of your salary, a few days after payday, into your secondary current account.
3) The money left in your main current account is for you to do whatever you want with, and that’s how much you have until next payday.
4) Transfer ALL your direct debits to your secondary account, to come out a couple of weeks after the payment from your main account.
Direct debit everything you can and make sure you know what you are paying for everything. Setting it up takes a little time to arrange, but once it’s done you’ll barely have to look at your bills, saving you time and worry.
Remember that you will have other non-monthly, large expenses to meet each year, e.g. car insurance, car tax, holidays etc. I suggest you siphon off additional money from your pay packet to a savings account to cover these.
What if my direct debits vary in amount?
Good question. If you have historic data, you can do one of two things: either take the highest figure you’ve ever paid, and use that when working out the total to transfer for bills, OR if that isn’t practical, use a prudent figure and be sure to eyeball the amount of the bill each month to see if your estimate covers it.
What if my direct debit only runs for 9 months or 6 months of the year instead of 12?
We pay in the amount for every month of the year regardless, and let it accumulate. Every year we move any excess to savings.
Isn’t it excessive to have two current accounts? That’s not very minimalist!
Minimalism isn’t just about always having less, less, less. It’s also about finding ways to automate necessary jobs and to spend less time doing mundane things that (without sounding too hippy-ish) consume your creative energy. If two current accounts help you avoid loans, overdrafts, overspending and financial chaos, then it is a minimal and elegant solution.
What if I get paid weekly?
Divide your direct debit expenses by 4. At the end of each week transfer that figure from your salary. Set all the direct debits to come out at the end of the month. At the end of the year (52 weeks) you will have a surplus that you can move to savings.
What if I’m self employed and my income stream is erratic?
Presumably you already pay yourself a salary of some sort and you know that you have a certain amount of expenditure each month, even if your income is high for two weeks and then low for two months. In this situation I would reverse the flow so that a) all income goes into one pot b) that pot pays for the bills FIRST and then you can take a salary from that pot as and when you can or need to.
How can you do this with a partner?
Set up a joint current account that pays bills only. Agree how much each of you will pay in to meet those bills. Then from each of your main accounts pay a chunk of your salary into the joint account at the same time each month to cover the direct debits.
Basically, no matter what the situation, you can find a way to make this system work – and once it’s in place, it is SO easy.
Super simple banking!