This is a method of banking that my wife and I came up with before we got married and decided to join our finances. It's a very simple trick that we invented. Alright maybe other people have done it as well, but we're staking claim.
The Problem
First let me explain the problem. We realized that joining our finances could be a recipe for disaster. We'd have two salaries directly depositing into our checking account. We'd also have money coming in and out for wedding expenses from savings accounts and parents. Plus we'd have money going out for rent, student loans, debt, utilities, bills and daily expenses. We understood that it would be very easy for either of us to misread our balance and overdraw the account.
Two Checking Accounts
Our solution was opening up a second checking account. We had our first checking account labeled as 'bills' and our second account labeled as 'spending'. We directly deposit our salaries into our 'bills' account and use that account for all our bills-hence the name.
We transfer money over to our spending account each month for everyday purchases. This includes purchases that might post irregularly like restaurant tabs with tips and internet purchases.
The general idea is that we separate and protect our important monthly expenses from our daily spending. In practice it's very useful to see exactly how much money we have to spend, not counting money that is already spoken for.
Overdraft Fees
Overdraft fees have made headlines lately with several banks taking steps to appease lawmakers and limit them.
The root of this problem is people spending money that they thought they had. Many times they overdraft their accounts with a few minor purchases. Since we started using our two checking account method we haven't overdrafted our accounts. This isn't because we haven't been low on funds. It's because we've had a much better picture of how much we had to spend.
Pay Yourself First
I'd like to mention that we also follow a 'pay yourself first' plan. So all of our long-term savings are taken out automatically before our pay hits our 'bills' account. I mention this only because the money we put into our 'spending' account is truly for spending. This gives us a lot of flexibility with how we spend our money. For example we can decide to be frugal with our spending money for a few months and then splurge on a vacation without touching our long-term savings.
Obviously the everyday expenses of a family of five will be different than a young couple. So you might need to change this system to meet your specific needs. You might also need to reach an agreement with family members about spending before you implement this plan. It certainly wouldn't work if you had someone running to the mall every time the spending money was transferred.
However as a tool for managing your personal finances utilizing two checking accounts can be practical and effective. In full disclosure I thought this was a ridiculous idea when my wife suggested it. I'll admit now that it has greatly helped our finances. It's so simple that it works. If you are one of the thousands of people that have felt the sting of overdraft fees or the frustration of trying to remember everything that's coming or going in your checking account maybe it could work for you.
Hello, this is my husbands blog and I would like to add a few things...about MY 2 checking idea that we have been using for the past 3 years =)
First, one thing he forgot to mention is that our debit card only can access our spending account. Since we rarely have cash on hand I was worried that we would be running around putting down our debt cards and accidentally overdraft our account. You can set this up at your bank so the card you carry can only access the funds that you can spend on a monthly basis. This include ATM withdrawals.
The second thing he missed was that the overdraft protection only goes ONE way as well. If we overdraft our "Spending" account the bank covers it and we get charged a bank fee. If we overdraft our bills account (which will never happen) then it would pull from our spending account. This helps to ensure that we will never...ever bounce a bill.
Good advice and it works!