One of the biggest mistakes people make, which I see every day, is that they have no idea how to manage their own money. There's not a single day that goes by where I don't get two to three people who are going into the red because they aren't keeping track of their finances.
These people have an online banking app, they have at-home online access to their finances, but they still come up to me and ask if my institution can waive their late fees...again. The common theme with these people has nothing to do with how much they spend or where they spend their money. Where they mess up is that they think they only need one savings, one checking account, and a debit card.
Why, you might ask, is this such a big problem? To put it plainly, it's because that kind of banking is basic and it shows that you're fine with throwing away your money until it bites you in the ass!
It doesn't matter if you still use that Excel spreadsheet budget your mom made for you, no one is going to keep track of their money and expect to save any real money with just two accounts to their name. However, you can easily fix that and learn how NOT to budget like a complete loser with just a few steps!
The people I see with jaw-dropping funds in their accounts have a few things in common: they have multiple savings accounts, they have at least two checking accounts, they have CD's and Money Market accounts set up, and they have some kind of personal loan set up to act as an overdraft protection plan for any "oopsies" that might happen.
This isn't because they have "too much money" for one account, they do it because they're modeling their primary institution like their budget. Think about it: how much easier would it be to keep track of your money, to make sure your bills got paid, if your account was set up the same way your budget is?
In theory, the best accounts should be structured something like this:
Obviously, your average young adult is not going to be able to have this entire setup when they first get out into the real world. But there's no reason why they couldn't get 8 out of 10 of these accounts set up for themselves and have it be manageable.
You can skip the money market account until you have enough saved up in the Emergency Fund or the Primary Savings, then apply for a secured credit card, build up some credit, and qualify for a Personal Loan and set up additional auto-transfers/overdraft protection.
In short, if you take less than an hour to set yourself up, it should be extremely difficult for your account to go into the red on a regular basis. I would highly encourage you to shop around local, small banks and credit unions to find your best options, particularly ones that won't charge you much for opening additional accounts.
So, we've got the accounts set up...now what? The next step should be to take a look at your current budget and see what all could be re-vamped.
Most people, if they've ever been taught how to budget, know about the traditional method of budgeting which is called zero-based budgeting. It's great for fixed bills and expenses that you know are not going to change on a month-to-month basis and leaves nothing else left over.
The problem with that is two-fold: People don't account for savings for that monthly budget and they throw in variable or periodic expenses (think groceries and vehicle repair) into that mix. It's no wonder that people live paycheck-to-paycheck when they're not anticipating price changes and their budget is designed to leave no cushion!
Some would argue that a 50-30-20 model should be what people base their budgets off of. What the hell is that? It's a percentage-based budget that is based off of your income and projects how much you should spend based off of what you earn.
In theory, 50% of what you earn should go to your "needs" (rent, mortgage, utilities, etc.), 30% should go towards your "wants" (entertainment, vacation, dining out), and 20% should go towards savings. You can play around with the numbers as needed, like a 60-20-20 or a 50-10-40 model, but it's flexible enough to meet whatever needs you have at that time.
In practice, I would encourage both models be used and regularly updated. Zero-based plans should be used for the big bills and to make sure you're not left without the basic necessities. The percentage model should be used as an intermediate gauge to check your spending habits, how well your income can cover your expenses, and to make sure you're saving enough to have some much-needed fun.
Now, that may cover the big stuff, you might say, but what about making sure we're not going crazy on our grocery shopping? This is where we can take a page from our grandparents' book in whipping out the envelopes and saving our receipts.
Granted, we have various apps from banks and independent companies (Mint comes to mind) that can spare us the file cabinets full of receipts, but the envelopes of cash are still an invaluable tool for checking how much you're spending when you're out and about.
It's easy to go to the mall, Trader Joe's, or to any of your favorite local haunts and swipe your life away, but having a set amount of cash in hand forces you to pay attention to what your buying. Not only that, but it also makes you question whether or not you really need to buy 4 jars of Nutella.
The principle is simple: go to the clothing/grocery/home improvement store with a wad of cash (no cards allowed), have a list in hand of things you need, and see how much cash is left over when you leave that store.
If you have money left over, PUT IT BACK IN THE BANK! You don't need to spend everything in the envelope, just like you don't need to eat everything on your dinner plate, so don't feel like you need to buy something extra just because you still have some extra bills.
When you consistently leave the store with extra money, reassess your envelope budget and try working with less money. If you find yourself having to split your transaction with cash and card payment, figure out if you need to come with more money or if there are some items you should take off of your list.
It doesn't have to be limited to just groceries and clothes, you can also have a refrigerator budget, which tracks day-to-day spending and allows you to keep a handle on pesky, impulsive splurging. It can include an allowance for eating out for lunch, bus/subway fare, or any other regular, daily expenses that you can reasonably account for.
That way, you can mitigate your impulsive spending and keep on track with your spending plan. While we're on the subject, you should also keep an envelope on hand from that "Fun Money" account I mentioned before. Whether you put that envelope in a safe until a certain time each month or you bring it with you every day, the goal of that envelope should be to blow it all away on something that makes you happy.
Not only does this idea (courtesy of Michael Malice) help you cut how often you impulsively spend, it makes your shopping habits a little healthier when you can segment when you buy for needs and when you buy for fun.
The whole reason why we save money, why we go through the headache of budgets, coupon saving, and talking with FSO's and financial advisors is so that we can get to the fun stuff. We want to be able to have some fun with the money we save up and to be able to improve our lives.
I hate it when people say that money is boring, too complicated, or is something only the greedy obsess about. Money is a way for us to be better, live better, and to experience more from life. The best part is that you don't have to become an investment guru or an obsessive penny-pincher to do that!
It takes less than a FEW HOURS A MONTH and a little bit of effort to save yourself from those awkward "Card Declined" moments. Isn't that well worth it, just to be a little less stressed out and a little bit freer for it?
This article is generalized financial and budgeting advice, meant for educational purposes only. The advice given does not reflect every financial circumstance and readers should consult their financial advisor, accountant or bank financial officer first before making any financial decisions. Any and all opinions and advice given are my own, based on my experience within the field of banking and finance, and are not to be taken as direct advisement.