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YOU MAY HAVE HEARD me say this before: I don’t think people need to budget if they have an effective spending and saving system. Recently, a reader of my blog challenged me on that point, arguing that you need a budget to ensure you’ll have enough to pay off your credit cards in full.
Au contraire, as we say here in New Jersey.
You may also have heard of the envelope method, where some people place money in envelopes for specific expenses. I follow that approach. But instead of envelopes, I use bank accounts—six of them to be exact, which I designate with letters A through F. I also embrace technology to help with saving and bill paying, and I leverage credit cards to garner rewards. You see, I’m not your stereotypical senior citizen.
Don’t worry: I don’t pay bank fees. The accounts are all linked and always hold sufficient combined balances to get free banking.
My income is from a pension and Social Security. My pension arrives on the first of the month, while our Social Security benefits get deposited on the second and fourth Wednesday. When that happens, this happens:
Don’t get me wrong, none of this is really my money or her money. While these accounts have specific purposes, we aren’t so inflexible that we don’t move money from here to there if it’s necessary—but it’s also rare. I’ve been known to pay for my wife’s hair salon visits from account A. Similarly, account C has bailed me out on occasion.
As complex as this may appear, keep in mind it’s all done automatically. After the transfers occur at the beginning of the month, account A’s remaining balance tells me what we have left for discretionary spending.
Nearly all of our monthly bills are paid automatically, either withdrawn from account B by the vendor or charged to a credit card to accrue rewards. The funds to pay those credit cards are already in account B as of the first of each month.
Confused yet?
Savings account D, which holds our Social Security, is designated as travel money. If we don’t travel, which is likely for the next year or more, it becomes an extra emergency fund or, as happened recently, a help-replace-a-car fund. A car helps you travel, right?
Once a year, I review our fixed monthly costs and adjust the amount transferred each month from A to B. If that goes up, as it always does, then I automatically know I’ll have less discretionary spending money available in account A. Yes, inflation on a fixed income is real.
On the other hand, our current health crisis has clearly demonstrated that we can get by on less. No trips to the mall, haircuts, biweekly salon visits, travel or dining out does actually save money. I’ve even been denied my daily cup of (plain) Starbucks coffee.
I noted that my income is a pension and Social Security, but that’s not 100% true. I have dividends and tax-free interest to fall back on. For now, that money is reinvested, but it’s also there to cope with inflation. If I need to build up cash reserves, I can stop reinvesting for a while.
So, you see, you really don’t need a budget. You just need a good banking app and some obsessive behavior about money—plus a partner who’s likeminded (sort of).
Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include It Took Decades, Making Cents and Scared Debtless. Follow Dick on Twitter @QuinnsComments.
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What are the last 2 accounts, Savings D and E (his and hers) designated for?
Looks like you have discretionary covered in A (his) and hers (C), and non-discretionary in B.
D is used for travel E and F are mini emergency funds. A and B are both bill paying of one kind or another, discretionary as well.
Gee and I thought I was uniquely creative. 😉
Great Article, Richard. I recently went the other direction due to 2 issues with my accounts. We have 3 checking accounts at our local bank. They raised the minimum without alerting me and I had a $9 fee for the first time. I looked at their new account structures and realized there is a better account for us if we combined accounts. We also had 6 savings accounts in an online bank. I was looking at them a few months back and saw the interest rate had dropped dramatically. I looked into it and they had created a new class of accounts which were basically identical to my current ones. If I opened a new one and transferred the money over we would get back to the higher rate. I called customer service and asked why they had made the changes and not notified us. They did not have a good answer. In said of opening 6 new accounts, I combined down to 2. Within the accounts in the two banks we do something similar in terms of deposing wages in one, pension in another. the online bank has a rewards credit card that is connected. We’ll see how long it takes for me to make it more complicated.
This seems way too complicated. We don’t budget and never have. When we were working we had our major savings directed to the tax deferred accounts and the remainder–essentially our budget–went into checking to pay the bills. Increasingly, bill payment is also automated. We used a savings account as an overflow, so if we accumulated too much in checking, we put some into savings to eke out some more interest. We do the same things in retirement. Our pensions and mandated withdrawals get dumped into checking and bills get paid from there. Occasionally, we have an excess and put it into the savings account. Occasionally, we need to take from savings, or even from investments and that money goes into the checking as well. But “the budget” is the normal amounts in the one checking account. And if I want to see our rate of spending or anything else about our outflow, it is all right there in one checking account. Maybe what makes this all possible is some regular spending habits.
What do you do for an emergency fund or to accumulate cash for a special purpose? Is everything in one savings account?
We follow the same approach although most of our bills are paid by automatic withdrawals from our savings or money market accounts. At the end of the day, I think a frugal mindset is the key to living within one’s means. A spendthrift could set up all of the accounts that Richard has but would always find an excuse for moving money around in order to buy whatever they wanted.
Ally has a “buckets” feature (https://www.ally.com/do-it-right/banking/what-are-ally-banks-savings-buckets-and-boosters/) that accomplishes all of this with just one account FYI.
I wasn’t aware of that. Took a look. Concept is the same. I just beat them by about forty years 😎
Oh my gosh Dick. When I retired 5 years ago I did the opposite. I consolidated accounts trying to simplify my life for me and certainly my wife since odds are she will outlive me. We have a checking account and a money market account (emergency account) at the same bank. These two accounts can also flow back in forth between our after tax brokerage account.
I’m not a budget person either, although I do a big picture budget once a year to make sure we are tracking on course and will not outspend our life expectancy. So far so good.
Dick if it works for you, great! Thanks for sharing.
It’s really not as complicated as it may appear. Everything is done automatically and I always know what money is available for each expense from taking a cruise (some year in the future again, I hope), to getting some cash from the ATM
I don’t recommend all the money in the same bank. I had a bank fail and it took 3 weeks to get the cash flow back to normal at a new bank (I did get all my money from FDIC). My brother had a bank account frozen until he got to court and had it unfrozen and got all his money (identity thief). You can’t set up a new account unless you have money to deposit, so if you get locked of your bank account, your screwed.
Saving = Income – Spending (regardless of reason)
Buckets are “OK” as guardrails or guidelines for spending.
Best “bucket” solution is the lowest cost version you actually embrace, use.
Worst “bucket” solution is when you use it for investment selection as well as budgeting/spending – resulting in a sub-optimal asset allocation.
For us – one checking account, one savings account (with credit card for overdraft protection), two HSA accounts (unfortunately separate accounts for spouse and myself required to make “catch-up” contributions). Everything else is invested – 401k, IRA, brokerage (includes funds for one-time purchases, emergencies, etc.)
One-time expenses:
Medical – may use HSAs monies, or other cash and put the bills in the “shoebox” so HSA assets continue to accumulate tax free.
Non-Medical – Depends, whatever makes the most sense (cents) – line of credit, 401(k) loan, withdraw from taxable brokerage. Always remembering to rebalance to target investment allocations.