This Simple 2-Account Budgeting Setup Could Help Families Avoid Accidental Overdrafts
Overdrafts rarely happen because people are careless with their money. It’s often a simple matter of timing and organization.
Paychecks don’t always align with bill due dates. If you act responsibly and set up auto-pay for your bills but your paycheck arrives a day after, you could suddenly get hit with a number of costly overdraft fees, even when you felt like you were being responsible.
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Changing your bill due dates, when possible, can potentially alleviate the problem. But many families are increasingly adopting a different system to avoid accidental overdrafts: keeping two checking accounts.
How could that help? Here’s a closer look at the strategy.
Why Two Accounts?
The two-account budgeting setup is simple. One account handles the bills, while the other handles everything else.
As simple as this strategy sounds, it can be effective because it draws a clear line between money that’s automatically deducted from your account and things that you pay as you go. This makes the division more useful than simply partitioning discretionary and non-discretionary expenses.
Here’s how it works: The first account covers mandatory expenses that are directly deducted, like your mortgage payment, insurance, subscription services and loan payments. The second account covers expenses that you have a bit more flexibility on and spend “out of pocket,” such as groceries, gas or dining out.
Essentially, the first account is an “autopay” account, while the other covers whatever else gets bought during the week.
On payday, you deposit enough to cover your monthly autopay bills in the first account. Whatever is left goes into the second account.
This way, you’ll always have enough to cover the bills that are automatically deducted from your account, preventing any overdrafts. The second account can help prevent overspending on other expenses, as you can see exactly how much money you have left to spend.
The Psychology of Money
Do you struggle with curbing your spending? Humans are hard-wired to spend money that they can see. But the two-account budgeting setup can help overcome this inherent psychology of spending.
Imagine that your monthly paycheck is $5,000. When that money appears in your account, your brain automatically thinks, “Oh, I’ve got $5,000 to spend.” But if half of that money automatically moves to your autopay account, your available balance is only $2,500. That’s the figure that you can accurately spend without consequences — although you still have to live within your means. Physically dividing up your money can keep you from overdrawing your account because you won’t be spending money that should already be allocated to mandatory autopay bills.
Commenters on Reddit describe the strategy in glowing terms, with one saying, “The bills account runs itself and just sits in the background. It’s amazing! Never overdraft again!” Another put it this way: “For any bills that have to be paid automatically, open a second checking account just for bills.”
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Who Could Potentially Benefit the Most?
Households with inconsistent income could have trouble budgeting. If you often get paid at different times of the month, it can be harder to avoid the occasional overdraft because there are periods of time when the account is dry.
The two-account setup can help here, although it may take a few months to set up properly.
Imagine, for example, that you have $2,500 in monthly autopay bills. One month you earn $3,000, while the next you earn $6,000. For the first month, $2,500 immediately goes to the autopay account, leaving you $500 to get by until your next paycheck. When the $6,000 month hits, first you allocate the $2,500 to autopay but then you use the remaining $3,500 for your spending account.
After a few months of this type of allocation, you will always have your bills covered in the autopay account and your spending account will build up a buffer that you can draw from during the leaner months.
What Are the Limitations?
There are a few potential land mines to be aware of when using the two-account system.
First, bills are not always predictable. While expenses like rent and insurance often remain fairly constant, utilities tend to fluctuate from month to month. Other types of mandatory bills, like medical procedures and auto repairs, can be sporadic and unpredictable. For this reason, it’s essential to have an emergency fund if you’re using this type of system. Without that buffer, the budgeting system can still break when unknown or irregular expenses hit.
The other problem is more fundamental. If you’re overspending every month because your expenses genuinely exceed your income, no budgeting strategy is going to work. In that scenario, you have to work on either lowering your expenses or boosting your income – or both – before you can effectively use a budget.
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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