The second I thought of the title for this blog the song by MC Rob Base and DJ, EZ Rock came to mind. I do not own the right to this music, nor did I write the lyrics, I just love the song…
It takes two to make a thing go right,
It takes two to make it outta sight,
It takes two to make a thing go right,
It takes two to make it outta sight
So what does this have to do with personal finance? Well, let me tell you. It is not only a great song, but it is also great money advice. Have two separate accounts to manage your spending, one for personal expenditures and another for household expenses.
Dual checking accounts are a fantastic way to keep your personal miscellaneous spending, like for clothing or dining, from your household expenses, like mortgage, rent, utility payments etc. You set up different accounts to manage both. It is actually borrowing a tool from the business sector. Corporations do not have one huge account to handle all their expenses. Businesses usually have multiple accounts each with their own special purpose, one will pay employees, one will pay utilities, one will receive income, and you get the picture. What I am suggesting is a simpler version of the same process.
How does it work?
The process creates two separate checking accounts. They can be at the same financial institution or different ones. The personal account is for “everyday” activity. You use this account for buying your morning coffee, clothing, gas, food, regular things. The expense account is solely for your major expenses, like rent/mortgage, utilities, insurance, credit card and loan payments. Expenses that support your life and you do not want to miss. These also tend to be your standard monthly or quarterly expenses.
There is also a variety of ways to fund the accounts. You can have your income direct deposited into the personal account and then move money over to the expense account as needed. This is how I personally have my accounts set up. Each pay period I calculate the dollars needed to cover my household bills, transfer the money to the expense account and pay my bills from this account. The money remaining in the personal account is mine to spend. You can also do the reverse, especially if you want to more tightly manage your personal spending. Your income is deposited into the expense and you transfer an allowance to your personal account. For me, I do this manually, but you can set up automatic drafts/transfers with your bank. Also, depending on who you work for or the source of income, you may be able to have the payee send your to separate accounts. This works out really well with the personal allowance method because a set amount can be sent to your account and it is not up to you to “limit” yourself each month.
How does this help you?
Excellent question! If you have ever overdrawn your account because you accidently spent part or all of your rent money, this is the set up for you. That will no longer happen, because the rent is in a designated account separated from your personal spending. The two should never cross again. There is less risk of spending money you should not and it is cleaner record keeping. All your major expense are in one place.
Plus, for me, it has made me very aware of how much I am spending each pay period on expenses and how much I am spending personally. I total all my scheduled expenses and transfer the money from my personal account to my expense account. Having to transfer over the lump sum amount can be eye-opening and caused me to pay closer attention to my expenses and how I am spending my money.
What about the cost?
That is a legitimate concern. Bank costs can be a deterrent, but if you are consistently paying overdraft fees or having checks returned this system is definitely something to consider. It could actually be a cost savings. Plus, with many banks, an account is free when set up with direct deposit. Research banks in your area and online, with no or low account fees, then calculate the annual cost of having an additional account. The cost of the separate account could be actually cheaper than covering overdraft fees.
Sometimes it really does take two…
I wanna rock right now
I’m Rob Base and I came to get down
I’m not internationally known
But I’m known to rock the microphone
Until Next Time…
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