I really like how I manage my finances and have been using the same system for years. There isn’t a one-size-fits-all system, so my intention with this post is to show what I use, why I use it, and encourage you to think about how your own system works for or against you.
Here’s the TLDR version for my current system:
- I use separate credit cards for fixed vs variable expenses (2 cards)
- I use separate checking accounts for income vs general expenses (2 accounts, same bank. I use AllyBank and they’re great)
Ok now for the longer explanation that will touch on the “why”:
Here’s a diagram of a system (that didn’t really work for me) I used the first couple of years out of college:
- Primary credit card for all expenses because I wanted to build credit and standardize my monthly billing dates for most expenses
- The bank would then bill the same account that received my direct deposits from work
Overtime I began to notice a couple of issues with this basic setup:
Hard to differentiate between fixed vs variable expenses
Fixed expenses are expenses that stay relatively constant month to month (your rent or car insurance) and are usually necessary costs. Variable expenses are expenses that tend to fluctuate and are usually more discretionary spending like takeout.
The problem with using the same card for both was that I frequently forgot that I was subscribed to a service I no longer wanted to pay for! It’s really hard to glance at your credit card statement and spot check for anomalies in either type of expenses when they’re intermingled.
Hard to tell what % of money was for expenses
I wanted more certainty around questions like “can I transfer X dollars out to Y account right now?” at any point during the month. The problem with having a single checking account that doubles as both an outgoing payments account and money receiving account is that I’m never confident how much money was going to be taken out.
Fast forward a few years of tolerating this process, I made a couple of tweaks to the core architecture that continue to serve me to this day:
- Separate checking accounts! One is for receiving money and the other is for paying bills (credit cards mostly)
- Separate credit cards! Pay for all of my month to month variable expenses (grocery bills, one-off doctors appointments) using one credit card and use another credit card for “background / recurring” invoices
- I transfer exactly the amount needed to pay off my upcoming credit statement (last months cycle) at the beginning of each month. This doesn’t much ambiguity around how much is leaving my bank
I really like having explicit control over how much money needs to go out month to month. By moving this money manually after reviewing my current credit card statement, I had a much better sense of what I was spending money on and how much money I actually had to spend.
Having separate credit cards for variable vs fixed expenses made it crystal clear each month whether I was getting unwanted charges in the background. I’d notice things like whether my internet bill went up or if I’ve been paying for some amazon prime channel that I haven’t been watching.
Finally, this diagram doesn’t nearly capture the full range of accounts and tranfers that I currently have but it has been able to scale fairly well to serve things like setting up automatic transfers to IRA’s on a monthly basis or automatic tranfers to goal oriented / vacation savings / general savings. The underlying system is still the same.