How does this work?
Most people deposit their pay check into a bank account. Or perhaps their employer automatically deposits it for them. Either way, the money from their income ends up in a check account on payday.
For simplicity’s sake, we will use a “two-bank” strategy to explain how this budgeting technique works. Basically, you will continue to deposit the money into your bank account as you did before. However, you will then set up a second bank account (at the same bank or a different bank).
What are the rules of this second bank account?
- It must be a checking account that you can use for everyday spending. It must have a debit card and/or offer ATM access.
- You should be able to transfer money from your first checking account into this account without incurring any fees.
- Ideally, the account will have few or no fees in general.
- Another “ideal” trait would be to have a good online account management site. You can go here to adjust the amount of the automatic transfer if necessary.
What happens next?
After you have set up the second account, you will set automatic transfers to go between the first and second account. You should set these transfers for a few days after you receive and deposit your pay check. You will transfer a percentage of your income. To start, plan to transfer 90% of the money that you deposit. If you have money left over after the first few months, you can lower the transfer amount to 85% (so that you are savings 15% instead of 10%).
The money transferred into your new account will be the money that you use for all your bills and your day-to-day spending. The 10% in the first bank account will then become your savings. You can use this for emergency expenses or save it to build wealth through investments. If you are comfortable with this strategy, you could potentially set up automatic transfers from the “10% account” to a savings account.
What if I need money faster?
Ideally, you would be able to build up your 10% account so that it could cover more expenses. However, unforeseen expenses may arise before you have saved much money in this account. One way to deal with this is to get an online personal loan. These loans often only take a day between application and the money being deposit in your bank account. This makes them ideal for emergencies. Then, instead of saving the 10% in your bank, you will use it to pay off the online personal loan. After the loan is paid off, you can return to your usual two-bank strategy.