Before I start, I want to give context in how this method has allowed me to save/invest 51% of my yearly paycheck for the last year. Before you say, “I can’t do that, I have bills, student loans, high rent, etc.”
I am a recent college grad living independently in one of the most expensive states (California) and one of the hottest rental markets (The Bay Area). I have $26,000 in student loans and according to some recent polls, my income is only 12% above average, and over the last year I have saved/invested $26,000. All while not having to budget or think about my spending after I set these 3 steps up.
Step 1:
Open a separate checking account from your normal spending account. This account will be utilized for your fixed bills that don’t change monthly. Add up your car insurance, rent, mortgage, student loans, cell phone, and anything else that is consistent month to month. Once you have this total you will divide it by how you are paid. If you are paid weekly divide it by 4 and set up your direct deposit to pull that amount into “Checking account 2”. This way at the end of the month you will easily pay your bills and just pull from this checking account.
Step 2:
Open a savings account at a separate bank where you won’t have easy access to. For me, this bank account is in the state of Michigan. I only have an ATM card for it, this way for emergencies I can pull out a max of $500 per day. If I ever wanted the full sum, I would need to make some calls and do an electronic transfer. Mind you, these transactions would have to happen during normal business hours. I know too many people in their early 20’s who will dip into their savings at 1 am on a Saturday and then kick themselves Sunday morning. After having your deposit from step one set up, you will take the lump sum that you currently have and have to decide how much you want to save weekly or monthly. You will in return have to decide how much you want for spending or “fun” money weekly or monthly.
Step 3:
Set up your main bank account to have fun money. This way you will automatically have your budget for the week, 2 weeks, or month. Of course, you will have some bills coming out of here such as groceries, gas, electric, and any other small items that will change. What this will do for you though, will allow you to decide if you’d rather have organic fruit or that new shirt instead. If you find yourself having too much money by the next paycheck, invest more in your ROTH, company stock, or savings. If you find yourself being having too little money before the next pay period, then go to your savings and change the direct deposit. In 2020 most companies are using direct deposit and a large group is using ADP where you can change your direct deposit immediately.
I am aware this method may not work for everyone, especially those with families, but I know this is great for young professionals who are figuring out how to budget. Start with the 3 steps and go from there. Get an emergency fund, start a retirement account, and spend your fun money worry-free.
