How to Structure Bank Accounts to Make Budgeting Easier

I created a cash flow system a while back and started sharing it with friends, family, and clients.  The feedback has been extremely positive.  

Whether you make $500,000/year or $50,000/year, this cash flow system will make a big difference in your monthly tracking.  It’s given us the freedom to be flexible with our spending, travel without financial guilt, and enhance our communication regarding where we are at with our spending for the month.  Not only will I lay out exactly what you need to know to implement this strategy in your household, but I’ve also provided a free worksheet to help you started.

Please note, this strategy is for your net take-home dollars.  Net pay is the dollars that hit your bank account after all savings (ex: HSA, FSA, and 401k contributions) and deductions (ex: taxes and insurance) are taken out from your paycheck.  This cash flow system will help answer where your money goes once it hits your bank account.  Without further ado, here is my foolproof cash flow system.

PHASE 1 - CALCULATE YOUR CASHFLOW (Budgeting Starts Here)

Step 1)  Add Up Your Monthly Net Pay

As described above, this cash flow plan is based on monthly net pay.  For most W2 workers, you are paid at least twice a month (sometimes 3x).  Therefore, look at what amount enters your bank account each paycheck and multiply by two.  Easy peasy.  The rest of the cash flow plan will be based on this figure.

Does your pay fluctuate because of bonuses, self-employment income, RSUs, or hourly pay?  That’s fine!  Use an amount that’s the most stable.  Payments above and beyond the stable value can be put towards savings, travel, or an increase in variable expenses.    

Step 2)  Calculate Your Automatic Monthly Savings

I start my budget worksheets with how much I’m saving for future me (and/or family).  If you save money, but it’s random, do not include it here (we’ll get to that later).  Incorporate any savings that you have set up ongoing.  Calculate the monthly figure.  

Step 3)  Add Up Your Debt Obligations

This one is the easiest.  We tend to pay the same amount every month for our debts.  What do you owe?  If you have any debt obligations that are not paid monthly, calculate what the monthly amount is.  The goal for this worksheet is to understand the monthly payment for everything we spend money on.  

Step 4)  Add Up Your Bills and Fixed Expenses

The next step is to add up all of your bills and fixed expenses.  I like to think of this category as an ongoing expense I’ve committed to paying.  These types of expenses tend to stay static with a few exceptions (utilities).  For an expense like energy, do a little extra work here.  Look back at the last 6-12 months and average out what you pay every month.  Expenses like insurance may be paid annually.  Calculate what the monthly dollar amount would be.  For example, my term life insurance policy is $550/year.  On this spreadsheet, I put $41.67 next to life insurance to show the monthly figure.  

Step 5) Calculate Your Variable Expenses

This is the step everyone stops at.  No one likes to calculate how much they pay in groceries, restaurants, clothes, beauty, entertainment.  It takes a lot of work to do it!  The work is worth it. There are so many apps that can help you with this.  The problem is the aggregation and correct data.  If you are running into those issues, look at a typical month, grab a pen and paper, and do the math.  You can do this!  

...Still not interested?  That’s fine too.  What we do with our clients who don’t want to do this step is assume whatever isn’t allocated to any of the above categories is then spent in this category.  For example:

• Net Pay = $4,000/month

• Savings Contributions = $500/month

• Debt Payments = $1,500/month

• Bills / Fixed Expenses = $960/month

• Variable Expenses = $1,040/month (Net pay minus everything else equals variable expenses).

Step 6) Make Adjustments with Surplus or Shortfall

If you’ve done the work to calculate everything, you should now be able to see if you have a surplus (extra money) or shortfall (negative money) at the end of each month.  If you have a shortfall, you need to find where you can trim back.  If you need help with that evaluation, send us a message.  If you have a surplus, this is the money you can automate towards savings each month.  Go back to the top of the worksheet and put a figure in the savings category that you will now automate going forward.  

PHASE 2 - STRUCTURE YOUR BANK ACCOUNTS

You’ve completed phase 1, now you’re ready to move on to phase 2 in which you structure your bank accounts to match the information you just created for yourself.  Here’s what I mean:

Step 1) Create a “Bills” Checking Account

If your bank doesn’t allow you to have multiple checking accounts, ditch them.  I’m serious.  It’s worth the hassle to set this system up right from the start so you can live out your days in budgeting bliss.  In this step, you will create a designated “Bills” checking account.  This will incorporate both the ‘Debt Payments’ and ‘Bills / Fixed Expenses’.  The individual had $1,500 in debt payments and $960 in bills in the example I used earlier.  Therefore, you will want to fund $2,460/month to this designated bills checking account.  For those who are paid twice a month, you could send half of your monthly “Bills” account obligation each time you’re paid.  

If you haven’t put it together by now, you will have to have every debt, bill, and fixed expense directly debited from this account.  Yes, you will miss out on some credit card points.  Credit card points do not provide enough happiness to overcome the stress of monthly budgeting.  Therefore, throw that thought out the window.

Think about it, each time your semi-annual auto insurance bill is due, you will have funded this account enough over the year to pay for it!  This account starts to work on autopilot.  All you have to do is link your expenses (once!), fund the account each time you’re paid, and you are GOOD TO GO.

Step 2) Create a “Spending” Checking Account

Don’t worry all you credit card point fanatics, I still got you.  This is where you can incorporate all the credit cards you want (although I highly recommend sticking to one or two…).  Using the example above, this person has $1,040 to spend each month.  She can keep track of how she spends those dollars if she’d like, or just know that her limit is her limit!  If she wants to go out to eat for $600 in a month, do it!  If she wants to spend $400 a month on clothes, do it!  The important thing is to stay within that $1,040 limit.  The key is how to track your spending in the month.  If you use one credit card and pay it off monthly, all you have to do is check your balance, and voila!  The balance is how much you’ve spent.  If you use more than one credit card, you’ll have to check each card and add up where you are at throughout the month.

Step 3) Create Other Checking Accounts

There is no limit to how many accounts and cards you can have.  For instance, Dan and I have a separate checking account labeled as “Travel.”  I’ll give you one guess on what that’s used for…  We fund this account using a few lump sum contributions each year.  This gives us the freedom to spend dollars on travel throughout the year without feeling like it disrupts everything else.

Be creative here.  If you’re in a partnership and want to have separate accounts for some variable expenses, open a separate checking account and assign a separate credit or debit card to that account.  If you’re working on home projects over the next few years, establish a separate “Home Projects” account for it.  Take this strategy and make it your own.

Let’s Wrap This Up

The trick is to have a purpose for each checking account and have a credit or debit card align with it.  Your debt, bills, and fixed expenses should all be directly debited from your “Bills” account.  Your variable expenses can go on your credit card and be paid from the “Spending” account.  Add other accounts like travel, home projects, individual spending accounts, or any other account that fits your lifestyle.  The more personalized you make it, the better.  

This will take work.  It will be worth it.  Do this work now so you can worry less in the future.  The feedback from our clients has been that it does take a few pay cycles to get it set up correctly.  However, once they did, they saw the transparency and communication in their monthly cash flow improve significantly.  Everyone deserves to have clarity on their cash flow.  That’s why I’ve helped you get started by providing you a free copy of our Cash Flow Plan worksheet below.  If you find yourself needing assistance, email us at hello@fyoozfinancial.com..

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EQUAL VOICES Wealth is a fee-only, fiduciary financial planning firm with offices in Minneapolis, Minnesota and Portland, Oregon. We work with couples who have a household income of $400,000 or more, or investable assets of $1 million or more. Our services include cash flow management, retirement planning, investment management, and tax-efficient planning strategies. As a fee-only fiduciary, we are legally required to act in our clients' best interests and do not earn commissions.