Mixing things can be good, like chocolate and peanut butter. But mixing too much in one pot can create a sludgy mess.
How does this relate to money? Mixing money together in one account can make it difficult to identify what you’ve earmarked that money for.
For example, let’s consider home improvement expenses. In the budget, that you totally have, you thoughtfully planned a category for home improvement. On average, you spend $300 on home improvements each month. But this figure is a bit misleading since you don’t spend exactly $300 each month. One month you spend $75, two months later you spend $500.
You’ve budgeted the money, but how can you make sure the money is available when you need to use it?
Separate Your Money
The answer is – don’t keep the money earmarked for home improvement mixed with the money you use to pay routine monthly bills. Set up a new checking or savings account at your bank and move the $300 you budget each month into this new account. Then, when you spend money on home improvement, you can pay it directly out of that account or move it to your checking to cover the expense. You know exactly how much you have to spend because the account balance tells you.
This approach makes the most sense for expenses that are either:
Not routine every month (like home improvement, auto repairs, medical bills)
Significantly variable when the expenses do pop up (like home improvement, auto repairs, medical bills)
Larger discretionary purchases (like travel, clothing, toys)
Of course, you can go too far with this method by setting up more accounts than you can comfortably handle. Five or six different accounts are manageable; ten accounts start to get cumbersome.
How many different accounts would you set up?