Managing your finances effectively can often feel overwhelming, so here’s a system that can help you take control and make your money work for you.
It’s designed to simplify cashflow management, reduce stress and guide you towards your financial goals with ease.
The idea is straightforward: separate your finances into three distinct areas to gain better control and clarity.
By dividing your money into three primary accounts, you can streamline your financial management and make sure that each aspect of your budget is addressed. This approach helps you maintain a clear overview of your finances, make informed decisions and build strong financial habits.
This separation allows you to:
How it works: the power of three
1. Bills account
This account is dedicated solely to covering your fixed expenses – things like mortgage or rent, utilities, insurances and subscriptions. Calculate the total monthly cost of all your regular bills and set that amount aside from each pay.
By separating your fixed costs into their own account, you reduce stress over bill shock as the money is already sitting in the bills account. This ensures your bills are always paid on time and removes the temptation to dip into this money for other purposes.
2. Savings/offset account
After your bills are covered, the next priority is savings. Here, you’ll decide on a clear savings goal – whether that’s building an emergency fund, saving for a holiday or working toward financial freedom. What’s great about this is the sense of progress you get. Each pay cycle, you’ll see your savings grow, which can be incredibly motivating.
Watching your savings balance increase creates positive reinforcement, encouraging you to stick with your goals. If you have a mortgage, you can also use this account as an offset.
3. Spending account
What’s left after covering your bills and savings goals is transferred to your spending account. This is your day to day account for discretionary expenses – groceries, dining out, entertainment, etc. The beauty of this is simplicity: you can spend freely within the boundaries of this account without worrying that you’re impacting your savings or bills. It’s about enjoying your lifestyle guilt free, knowing that the other key areas are taken care of.
Building financial discipline
This system also helps build strong financial habits. When you automate your bill payments and savings, you’re less likely to make impulsive decisions. You’re setting your finances so that the essentials and goals are taken care of first, leaving what’s left for your “wants”.
How offset accounts can work here
People often say, ‘I have an offset account, isn’t it better to have everything in there?’
A common recommendation is to consolidate everything into a single offset account using it to manage your bills, savings and spending all from one place. While this approach simplifies the number of accounts you manage, it can create challenges.
When everything is pooled into one offset account, it can become difficult to track your expenses and savings. The inflow and outflow of monies can obscure your true financial picture, making it harder to see how much you’re saving or whether you’re staying on track with your goals. This can lead to the frustration of not knowing exactly where your money is going or feeling like you are falling behind.
But the best thing about offset accounts: some banks will allow you to have multiple offset accounts against a single loan these days and even when they don’t (like my bank), there are ways to structure your situation to ensure you are getting the full benefit of all three accounts offsetting your mortgage.
If you’re tired of feeling uncertain about where your money is going or want greater clarity around your savings to ensure you’re hitting your goals, this approach could be a game changer for you.
Source: FAAA
