Bank Account Setup for Financial Freedom

[Rossco]

Hi,

I'm considering setting up a new set of bank accounts to assist with 'controlling' the spending of my income.

I've been reading into two different methods with using banks accounts; one from a book called Prosperity Consciousness and the other from a book called Secrets of a Millionaire Mind.

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The bank account setup from Prosperity Consciousness is as follows:-

1. The Income Account is an account where you funnel every bit of money that enters your life. It provides an artificial delay between money entering your life and money leaving your life. That delay gives your prosperity consciousness a chance to come up with creative ways to generate the money you need in your life. It stops you spending what you earn without thinking.

2. The Financial Independence Account is a savings account into which you put a portion of your earnings but never, yes never, take them out again. The account provides the financial backbone to your prosperity consciousness because your mind will always be aware that there is money in your life. And eventually you have enough in there to give up working and just live off the interest.

3. The Annual Income Account is used to gradually build up cash until there is enough to live off for one year then you have the freedom to give up working for one year and allow your creativity to blossom.

4. The Large Purchases Account is an account in which all the money in it must be spent regularly on something you don't need. It teaches you to spend without guilt because there will always be more on the way...an essential state of mind for Prosperity Consciousness. And there is a further twist in that the account can help you acquire a state of mind that enables you to draw money magically into your life just by thinking about a specific sum...an extremely spooky experience the first time it happens, I can assure you!

5. The Investments Account is used for money that can be invested with minimal risk in something that will earn more than being kept in a bank.

The bank account setup from Secrets of a Millionaire Mind is as follows:-

1. Financial Freedom Account (10% of your income)- used only for investments and buying or creating passive income streams. Money is never spent, only invested. Also, have a Financial Freedom Jar where you deposit money each day ($1, $10, loose change). Do something daily.

2. Play Account (10% of your income)- Use this money to nurture yourself. Use it for extra-special things in your life. The only guideline is that you must spend the money every month. Use it each month in a way that makes you feel rich!

3. Education Account (10% of your income) - Set aside money for your education (school, seminars,etc.) or your child's education.

4. Long-term Savings for Spending Account (10% of your income)

5. Giving (10% of your income)

6. Necessities Account (50% of your income)

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My thoughts were that one would have to take into account a method that would include easily being able to pay for general bills and living expenses on a weekly/fortnightly/monthly basis so I've devised the following accounts which could possibly suit my requirements:-

1. The Income Account - All income generated is placed in this account (either through electronic transfer, direct debit through an employer, deposit, etc).

2. General Expenses Account - 40% of your weekly income would be placed into this account for general bills/expenses such as rent, car loans, mobile phone repayments, etc. This account would generally be linked to a visa debit card in case you would have to setup direct debit through your visa debit card.

3. Giving/Good Samaritan Account - 5% of your weekly income would be placed into this account so it *could* be used for giving in voluntary circumstances.

4. Play/Necessities Account - 25% of your weekly income would be placed into this account to be used for food, bus fares, and anything else that has to be purchases at a moment's notice. This account would be linked to a visa debit card and would be used as your primary visa debit card for daily use.

5. Long-term Savings for Spending Account - 20% of your weekly income would be placed into this account which would be used for education and large purchases. This account would be setup as a high-interest account.

6. Financial Independence (MOJO) Account - 10% of your weekly income would be placed in this account and never withdrawn. This account would be setup as a high-interest account.

This system might require an entire re-work if one would have a loan account attached to an off-set account (which would bring down the interest payable on the loan).

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What are your thoughts on using one of these systems and how could one best utilise these methods working purely through Internet Banking and using a Visa Debit Card?

Speak soon,

Rossco

[Agota]

I suggest you to take a look at Ramit Sethi's book "I will teach you to be rich". It's a very good book about automating your personal finance.

[SatvikBeri]

Originally Posted by Agota

I suggest you to take a look at Ramit Sethi's book "I will teach you to be rich". It's a very good book about automating your personal finance.

You beat me to it. Ramit's book has great, practical suggestions on automating your finances so that you can ensure your financial security and not have to bother micromanaging all your bills.

The %age of income system seems a little silly and needlessly complicated because your expenses and income are not directly related.

[danthony]

I've done this and I can tell you from now, you won't awake to find magical amounts of money in your accounts. It's more of the mechanics of learning how to save of why this method works. concentrate more on the action than the idea behind multiple accounts.

[SnerpGoodWord]

Both those schemes are mickey mouse ********. If you're having problems with your finances it has nothing to do with how many bank accounts you have or what they're called and everything to do with how much money you take in vs. how much you spend.

In the current economic environment the only two accounts you need are a checking account and a good brokerage account plus any accounts that get special legal treatment (401K, HSA etc). Savings accounts don't pay enough to be worth your time.

[Bradman]

Originally Posted by SnerpGoodWord

Both those schemes are mickey mouse ********. If you're having problems with your finances it has nothing to do with how many bank accounts you have or what they're called and everything to do with how much money you take in vs. how much you spend.

In the current economic environment the only two accounts you need are a checking account and a good brokerage account plus any accounts that get special legal treatment (401K, HSA etc). Savings accounts don't pay enough to be worth your time.

Sort of what I was thinking too. I just got rid of a couple accounts because they started charging fees, also I had a savings account and the damn fool credit union would charge an "inactivity fee", so I said if you don't want my money anymore, fine, I'll take it away from you. Now I'm down to just one bank account (no fees), 401k, and a brokerage account. I suppose owning some gold and silver coins would be a good idea too.

[CoolBee]

For about 10 years I had
(1) a savings account paying reasonably good interest into which I had all my income from all sources paid (at work I gave the details of this account to the salaries department). Over that 10 years, I received some income quarterly in advance, some monthly in arrears, some 4 weekly in arrears, some weekly, and some cash in hand.
(2) a current account. In the UK we normally budget monthly or weekly (eg mortgage, credit card and other payments are made monthly). I put as much as possible on direct debit (where the company takes bill payments from your bank account).
Each month I would pay myself a 'salary' from the Savings account to the Current Account which covered my living expenses plus a few £ for unexpected or frivolous purchases.
As what I was paying myself was less than my income, my savings started to build up, slowly at first then more rapidly. In particular, any pay rises received were automatically in the savings account unless I increased the monthly 'salary' - which I did no more than twice in 10 years. It also acted as a 'smoother' when sometimes my income was less than my expenditure - meaning I could sustain my monthly 'salary' without worry or indeed on those occasions when I received a lot more than usual - prevented me from going mad with it.
The good thing about it was that within a few months, I had accrued a month's 'salary' in savings and so on and was able to quit full time work after about 10 years.
Now I'm living abroad things have changed a bit because I still have UK commitments as well as here, but the philosophy is the same.
I'm not sure I would go so far as to have 5 accounts, but having money paid straight to savings was definitely a great move for me! (Having said that, right now I have rather more than 5 and actually one of them is set up to pay me a certain monthly income for 3 years starting in around 3 years time - just in case -(can always save it again if I don't need it) so it sounds like I do something like those guys.)

[Agota]

Awesome strategy, Coolbee!

I really liked the idea of paying yourself a salary!

[Lioness]

The most valuable advice for the average person, I think is to save at least $1,000 in an emergency fund. Emergencies will happen and at the worst times. Having the fund prevents you from going into (more) credit card or personal debt. Then you can concentrate on paying down debt/investing.

My new plan is to auto deposit 10% of my paycheck to savings, increasing the emergency fund, then I can allocate it to subaccounts as needed. 10% to retirement plan. The remaining 80% I will automate all bills, and only the remainder can I spend. Won't be much left after food, but it's a plan.

While Dave Ramsey advises to cut up credit cards and use cash only, Ramit auto pays all bills by credit card, pays off the balance each month and earns perks/rewards. I think this will work for me because of the automation factor. The problem is, since I have a current balance that I can't pay off yet, I can't just set up a monthly debit from checking to auto pay whatever the balance is like he does. I have to figure out how/when to set up an auto debit that will pay off the new cc charges on time each month. I don't like the idea of the utility companies debiting my checking account directly. Any other ideas appreciated.

[Rossco]

Thanks to all of you for your valuable insight and detailing your own systems and how they work for you.

You are correct! Unless you build a good habit (internalise the meaning of money), then having all these accounts won't help you when you put it into perspecive.

I've thought about the account setup again and my current financial lifestyle which involve placing a sum each month into a children's account and soon I'll be graced with the dreaded mortgage repayments.

What's put a spanned in the works is this;

I can link an offset account to my mortgage account which means if I had a loan of 200,000 and I had 10,000 in the offset account, then I would only pay interest on 190,000 and I'll also be able to pull out the funds if required for an emergency.

The alternative is to place all the funds: savings or otherwise into a high interest account but then I'll incur a tax on the interest, read income, that's generated from these types of accounts yet if I place it all in the offset, then I won't be taxed on it due to the interest rate being very low and due to it being an offset account. The more I have in this account, then the more I will save on interest every year which brings me to my next question.

Should I leave everything in this account or still have high interest savings accounts as I was contemplating placing everything into the account, and then as mentioned above pay myself and my partner into our respective credit cards for the daily expenses but keeping the offset for the emergency fund, children's fund, and general savings funds which would simplify everything for me.

My possible downsides are that mentally I would be locked into this type of system without the ability to invest as I'd always think that I would still save more leaving it in the offset account.

What are your thoughts?

[CoolBee]

Check out those mortgage off-set accounts. I was interested in that idea at one time until I looked into it and found that the interest rate they charged on the loan was higher than I was able to get elsewhere - and to cut a long story short, it was more to my advantage to not do that.
Now with interest rates very low, everyone in the UK is madly paying off their mortgage - but my mortgage rate is a 'tracker' which I took out before the crisis and so money paid off the mortgage would only 'earn' me about 1% interest p.a. whereas I can at the moment find savings accounts paying over 4% (and this also takes into account the tax element) so it's better to accrue 'paying off mortgage' money into a high interest savings account and if and when mortgage interest rates increase above the net interest on the savings, then start paying chunks off.

PS I am NOT A FINANCIAL ADVISOR, THIS IS A PERSONAL STRATEGY! FOLLOW AT YOUR OWN RISK (I have to put that LOL!)

[Rossco]

Thanks for the response!

This article is what made me think about it as interest rates for home loans are pretty high in Australia...

Savings vs Offset Account - Latest News | Barnes Home Loans

In other news, I had a look at my superannuation contributions (401k equiv) and it seems like Im above the tax bracket in order to get a dollar for dollar contribution from the government i.e. I pay $1000 and the government matches my $1000 so I would have made $2000. I'm also looking into paying my student loan off sooner but there is so much to think about (when it comes to finances).

[Sansone]

All those accounts seems like overkill to me.

For a while when I was married, I did have good success using a separate bill-only account.

First I added up all the easy items that were always the same cost: phone, internet, rent, insurance policies. I added motor vehicle registration and I think one or two other annual regulars, I forget which now.

Then I figured out averages for variable cost but regular items: electric and heating oil were the main ones. I rounded these up and padded them a little to leave wiggle room.

At this point there was a mandatory monthly cost, so we had that amount plus a little extra directly deposited into one account. That account had as much stuff as possible automatically debited at bill time. A couple checks would get written from there as well, like rent, and there was always more than enough money.

Everything else went into the regular account. It wasn't exactly a lot of money, but whatever was left after food and gasoline was up for grabs, so it was easy to have a handle on how much was spendable at any time.

When that started to seem like a lot, I would take it out and put it in a box.

I was surprised at how much extra ended up in the bill pay account after a little while.

The reason I think this worked so well, is that since the bill pay account just automatically handled itself, it never really had to be looked at. I'd double check it at the end of the month, but that was all.

From what I've seen, a big problem with people I know who live week to week is that they see this jump every Friday or whatever early in their monthly billing cycle, and it seems like there's plenty available for spending.

Then the last couple paychecks they end up feeling strangled because their whole next paycheck has to pay the biggest bills.

But yeah, I found that not even looking at the pass-through money definitely helped me look at what was left more realistically and make better daily decisions.

[CoolBee]

Originally Posted by Agota

Awesome strategy, Coolbee!

I really liked the idea of paying yourself a salary!

This was a breakthrough for me way back when (about 1997 I kinda had this lightbulb moment!) - restating what someone else above posted - divorce your expenditure from your income. There need not necessarily be a relationship. Identify what you need (nothing like quitting executive level pay and going back to uni on a research grant to 'help' you realise exactly how much you DON'T need ), and that has to be your minimum target income but after that, then just how many yachts, Harleys and diamond necklaces does one person need

[Lioness]

Originally Posted by Sansone

For a while when I was married, I did have good success using a separate bill-only account...That account had as much stuff as possible automatically debited at bill time.

Aha! I think this might work for me. A separate bill-pay account means that a mistake or fraudulent charge by a creditor can't wipe me out. I just have to figure out how much to put in each pay and which bills will be paid when.

I hate to lose the cc cash rewards, though. I have to sit down and figure out which fits better for me.

...divorce your expenditure from your income.

Like this concept

[CoolBee]

Originally Posted by Lioness

Aha! I think this might work for me. A separate bill-pay account means that a mistake or fraudulent charge by a creditor can't wipe me out. I just have to figure out how much to put in each pay and which bills will be paid when.

I hate to lose the cc cash rewards, though. I have to sit down and figure out which fits better for me.

Like this concept

If you are seriously worried about the likelihood of a charge by a creditor wiping you out, then depending on your country, make sure your separate bill-pay account is from a different banking group. In the UK, banks in the same group will sometimes allow debts you owe in one bank to be recovered from another account within the same group without reference to you. Could be the case in your country!

Also, it can be difficult to track down sometimes which banks are in which group - you'd be surprised! Different name, same group!

Having said that, in the UK 'direct debits' come with certain guarantees regarding incorrect charges.

[Rossco]

Thanks for the great advice!!

I might do a quick analysis with the offset va the high interest setup, and then try link that to my mortguage along with the separate bills account.

I might map it out an get back to you on this post of how I'm tracking with everything!!