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If it’s one thing that I’ve come to love, it’s budgeting using multiple bank accounts! Yes I know, it sounds intimidating, but once you get the hang of it budgeting becomes a breeze.
My favorite thing about multiple accounts is the fact that I've set up a separate account for paying bills. I like to call this my “bills account” and if you don’t have one then I suggest opening one today. Like right now! And in this post, I’m explaining how to do it.
Pros of a “bills account”
When all of your expenses are thrown into one account it’s difficult to determine what part of your account balance goes to what. You may be unknowingly spending money from one expense on another and it just ends up a big ol’ hot mess!
Unfortunately, many people still mix their essential expenses (necessary) with their non-essential expenses (not necessary). This means that if you go out and whoop it up a little too hard this weekend and your fun money is sitting in the same account as your rent money then guess what?
You may have very well just used some of your rent money on entertainment. And what happens when we don’t have enough to pay our bills? We get hit with late fees and overdrafts!
The main benefit of separating your bills is that no matter how bad you screw up your other budget categories, you can rest assured that your bill money is unaffected. You may be all out of fun money but your rent will still be paid!
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What expenses should be included?
Your bills account should all, or the majority, of your essential expenses. Most of these will be your “fixed expenses” which are those that are the same amount.
- Utilities (water, electric, gas, etc.)
- Insurance policies (auto, life, health)
- Loan payments
- Cell phone plans
Notice how I didn’t include other essential expenses such as groceries and gasoline. That’s because these expenses are variable, meaning the amounts change based on usage. While you can include them in this account, you will need to keep track of the amount you have left to spend.
How to set up a separate account for paying bills
To set up a bills account you will need to either designate or open a new checking account with the financial institution of your choice.
You don’t need a fancy account with a high-interest rate, a free basic checking is all you need.
Of course, there may be different perks depending on the bank you choose but before opening your account be sure to look at:
- Monthly fees
- Minimum balance requirements
- Minimum opening balance
- Transfer limits
Calculate the cost of your monthly bills
Next, you will need to calculate how much your monthly bills are costing you. This part will be easy for your fixed expenses, but for those that fluctuate, you’ll need to dedicate a little bit of time.
If you don’t already have a budget created, gather your last 2-3 bank statements. Go through each statement and add up how much you’re spending on each expense. Depending on the amount, allocate an amount you can realistically stick to.
For bills that fluctuate, but are only paid once, such as an electric bill, gather your last 3-4 bills and find the average. You can opt to use the average as the amount to budget for or add in a buffer for possible higher than normal months. In my Budget Boss eBook, I break down how to properly budget for these types of expenses so if this part has you breaking out in hives I highly suggest downloading a copy!
Depending on the expenses you will include in your bills account, add up the monthly cost.
So, let’s say your monthly expenses look like this:
- Rent $900
- Electric $120
- Water $65
- Cable/Wi-Fi $80
- Cell phone $50
- Auto loan $350
- Auto insurance $105
- Renter’s insurance $25
This would make your total $1695.
Divide your monthly total by number of paychecks
Depending on the total number of paychecks you receive a month, divide your monthly total between them. So if your total is $1695 and you get paid bi-weekly, this would come out to be 847.50 you’d need from each check.
Set up this amount to be direct deposited into your bills account each pay period. Many employers allow direct deposit, but if this is not offered then you can set up a recurring transfer between accounts that are typically free of charge via your bank.
Automate your payments!
Automation is King! Seriously, my bills account is a sorta like a set-it-and-forget-it type of thing because my portion for the bills is direct deposited and my payments are all automated.
Here are two ways to do it:
- Auto-pay via service provider/lender: I recommend going this route, especially if your monthly payment is not the same each month. The payee will withdraw the exact amount of the bill from your account on the due date.
Go directly to the payee’s website and find the payments tab. Select the option to set up automatic payments (or auto payments) and enter your bank account information.
- Bill-pay via online banking: Sign in to your online banking and select the bill pay option. You should be directed to a screen where you will be prompted to enter the payee’s information as well as the payment information.
Voila. Your payments are now set up to be withdrawn automatically. No more worrying about forgetting to pay a bill and getting hit with a late fee. Be sure to check in regularly to make sure that your balance is reflecting what it should. This will ensure that you have enough to cover your upcoming drafts.
Mixing your personal and bills money is risky business, and can result in fees, debt, and stress! Give yourself peace of mind and set up a separate account for paying bills.