Having separate bank accounts for budgeting is a must.
This is an essential part of the household budgeting process, especially if you want your budget to run simply and smoothly.
Segregating types of expenditure helps to identify your priorities, ensure all expenses are met and determine where you can begin cutting costs.
But don’t get too crazy!
While having separate bank accounts is important in managing your budget, having too many accounts can complicate your financial situation.
Remember, simplicity needs to be at the core of all household budgeting. Without simplicity, your budget will not be sustainable.
Separate Bank Accounts for Budgeting
So, how many types of bank accounts should you separate the management of your budget into?
This will all depend on your situation, but here’s a start, in order of importance:
Everyday Bank Account
At the crux of your budget will be an everyday account. An everyday account should be used to cover everyday general expenses, such as rent/mortgage repayments, groceries, car running costs, phone/internet, insurances, water/electricity, etc. Basically, any shared costs and expenses associated with running the household.
An everyday account should be a standard bank account with good functionality for ease of transfers, bill paying and BPAY options, access to cash through ATMs, etc. If you have a home mortgage, a mortgage offset account may be a good idea.
The first purpose for running a budget is to make sure you can cover your everyday expenses. Hence, the need for an everyday bank account, as discussed above.
The next reason for having a budget is to put savings aside. You might be accumulating savings for emergencies and unforeseen expenses, or for future goals, such as holidays, deposit for a new home, new car, or something else you might be savings for.
Some people like to have a separate savings account for each goal (i.e. a holiday account, a new car account, an emergency account, etc.).
Again, if you have a home loan, some banks will allow your separate savings account/s to also be mortgage offset accounts. Otherwise, a high-interest online saver account, linked to your everyday account, may be suitable.
Personal Bank Accounts
I’m a huge fan of personal bank accounts in addition to an everyday account and savings accounts. A personal bank account should be used for highly discretionary expenditure, such as coffee dates, movie tickets, nights out at the bar, etc. This account and type of expenditure should be treated as allowance each week. Think of this account as a disposable nappy; it’s to be used and abused. We all need to have some ‘fun’ money – money we can just use to splash out with each week. That’s what this account is for.
This account is especially important for couples. By having a separate personal bank account each for weekly ‘high-discretionary’ spending, with the same allowance paid into each account every week, there will be no arguments over one member of the couple spending more than the other, or a disagreement on what the money is being spent on (which would otherwise occur if this type of spending happened from a joint bank account).
Managing Multiple Bank Accounts
I’m a massive fan of simplicity in managing family finances. This is especially important when you are utilising separate bank accounts for budgeting.
For this reason, I think it is best to hold all bank accounts with the same financial institution. Doing so allows for ease of transfers between accounts, immediate transfer of funds between accounts and the ability to view all accounts through one online portal.
Using bank accounts or term deposits from other financial institutions may result in better interest rates, etc.; however I believe the benefit of any additional interest earned is negated by the complexity it adds to your financial situation. If very large sums of money are involved it may be worth looking around, but in general, I’m not convinced it’s worth the hassle.
Separate Bank Accounts For Bills
Some people like to have a separate bank account specifically for bills. This isn’t such a bad idea, especially when the amounts to be paid are irregular and generally lumpy payments made once a year, every six months or quarterly. Such bills may include electricity, rates, car insurance and registration, life insurances, etc.
Personally, I don’t have a separate bank account for bills. We pay all bills from our everyday bank account. This is just our preference, so that we have less bank accounts to manage.
One thing that can be beneficial is to arrange monthly payments for as many of these bills as possible.
For example, in many cases services providers and governments will allow your to pay your bills monthly or at least contribute monthly payments towards the cost of it. We contribute to our council rates and water on a monthly basis and pay all insurances monthly, so that we don’t get whacked with a massive bill at an unexpected time.
Some companies will charge more for monthly payments (compared to annual), but again, I think it’s worth the additional charge to maintain a smooth budget and flow of funds. It’s much easier to manage and keep on top of,
Separate Bank Accounts for Taxes
As an employee, you will generally have tax deducted from your wage each week as Pay As You Go (PAYG) payments. So, unless you have significant other income, such as investment income or rental property income, it will usually not be necessary to have a separate account for taxes.
If you are self employed, you may be required to collect and pay GST as part of your business and will be required to pay your own PAYG on a quarterly basis. In this case, a separate bank account is very useful.
For GST, retaining adequate funds in your business account for this purpose is usually best. You don’t want to be confusing business income and expenses with personal income and expenses. You might like to have a business operating account and a business tax account (both accounts should be in the name of your business). I just have one business account and make sure I leave enough in there to cover GST.
For personal PAYG payments as a self employed person, a separate personal bank account is usually best. For instance, I am self employed and make regular withdrawals from my business account for the same amount every week. I then siphon off a certain part of that amount into a separate PAYG account as an automated transaction each week. This way, I can be sure I have enough money to cover PAYG payments as they fall due every quarter. To figure out a rough guide of how much PAYG you need to siphon of each week, multiple your quarterly PAYG obligations by 4 (quarters) and then divide by 52 (weeks).
Separate Bank Accounts For Budgeting
Click here to grab your very own free family budget income and expenses flowchart that you can customise for your family. Fill it out, add to it if you wish, then print it out and stick it on your fridge so that you have a visual representation of how your family finances work. It makes managing money so much easier and a lot less stressful.
Hope it helps. Let me know what you think.
Author: Chris Strano
After playing a vital role in the creation of his two sons, Chris Strano gave up his former-life as a financial adviser to dedicate his time to providing everyday families with basic money management advice. Drawing on his years of education and experience, he has also developed an affordable 100% digital course showing young families how to build their own custom household budget and savings plan to work towards their goals, using financial planning strategies (without the cost of a financial adviser). You too can get started by grabbing his free 6-Step Budget Cheat Sheet at Build A Family Budget and follow him on Facebook and Instagram @SmartFamilyBudget.