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Financial Organization: Your Bank Account

Updated on October 10, 2014

Bank Accounts: Lump Sums Just Didn't Work

I remember opening my first bank account when I was young. It was your standard savings account. I had a passbook that was stamped every time I made a deposit or withdrawl, and online banking wasn't a thing then. Every time I received a check, my parents would drive me to the bank, and I'd proudly wait on line to deposit it and see how much my money had grown since my last visit. It wasn't until college that I opened a checking account with a joint savings account. I got my very first debit card and an online banking ID, and boy did I think I had it all.

That system worked for me while I was in college... I had no monthly expenses (save for the all important Netflix!), I just had to make sure I had enough money at the beginning of each semester to cover whatever expenses I had. But once I graduated and moved out into the real world, having one lump sum sit in my checking account and another lump sum in my savings account didn't work for me. I had rent to pay! And student loans! And groceries! And dining out with friends!

Things had to change. I knew how much money was coming in and had a vague knowledge of what I owed and to whom, but I had a difficult time keeping track of what I was spending. I was disorganized and had no clue where my money was going. The first thing that needed to change? My bank account.

How Organized Are You With Your Financials?

How confident are you in your financials when it comes to your bank?

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Get It Together: Know What You Owe

The key to success with financial stability is knowing exactly how much you make, and how much you pay, with the former being the greater number. You should create a list of all your expenses, adding as much information as possible.

Create a spreadsheet that includes all of your costs, making sure you have the timelines correct. You may pay your rent every month, but your car insurance every six months. The easiest way to do this is to break every expense down by month, since most of your bills are most likely on some sort of monthly timeline (every month, every three months, every six months, etc.).

Add up all of your expenses and subtract that from your monthly pay. Your earnings should most definitely be greater than your expenses; if not, you have some work to do.

PNC Virtual Wallet's Sub Accounts

You can organize your sub accounts using PNC Virtual Wallet with their reserve and growth accounts. (Example reserve account shown on bottom right.)
You can organize your sub accounts using PNC Virtual Wallet with their reserve and growth accounts. (Example reserve account shown on bottom right.) | Source

CapitalOne 360's Sub Accounts

You can organize your sub accounts using CapitalOne 360's account.
You can organize your sub accounts using CapitalOne 360's account. | Source

The Importance of Sub Accounts

So now you know how much you make and how much is going out. You're all set, right?

For many people, the temptation of seeing on lump sum sitting in their bank account is too great. They forget that their money is already earmarked for other important things. Suddenly, those $200 shoes or that $400 video game console seems much more affordable.

Some banks offer what's called "sub accounts." Plainly speaking, a sub account is an account within an account. Similar to the envelope system, it's a great tool to help organize what funds are going where. For example, let's say you have $1,000 in your account and have $500 due in rent and $300 due in student loans coming up. With your standard account (lump sum), you would simply see $1,000 sitting there, making the temptation to spend $300 strong. You spend that $300, leaving you with $700 to cover $800 worth of expenses. Ouch.

Instead, you utilize an account that features sub accounts. Knowing that you have a $500 bill and $300 bill coming up, you create two separate sub accounts and stick those funds there, leaving you with $200 to do with as you please.

What Sub Accounts Should You Include?

What sub accounts do you need? This answer will vary according to the individual, but the general concept will remain true for the majority of people.

Fixed Monthly Expenses

What do you pay every month that doesn't change? Some examples are...

  • Mortgage/Rent
  • Student/auto/personal loans
  • Cable/Phone/Internet

Ideally, you should have a separate sub account for each fixed monthly expense you have. When your bill is due, empty the sub account and pay it. Simple as that!

Variable Expenses

Variable expenses are those that you know you owe and are coming up, but you're not sure of the exact amount, or the amount changes each month. Examples include:

  • Utilities
  • Credit Cards

Like fixed expenses, you should create sub accounts for each variable expense. In theory, you should have a general idea of what these expenses will be and should plan accordingly. When in doubt, estimate higher so you'll be more prepared.

Short Term Emergency Fund

Give yourself some breathing room by keeping extra money close by. Did your utilities cost skyrocket this month? Did your car break down? Prepare yourself now so you don't need to fret later!

Short Term Medium/Large Expenses

If you're planning a medium or large purchase within the next year, earmark that money with a sub account so you can easily see 1) how much money you've saved so far for it, and 2) how much left you need. You'll be surprised by how motivated you'll be to save towards it.

It's Pay Day! Now What?

To keep yourself organized, act quickly once pay day comes. How often you update your sub accounts will depend on how often you're paid. You should be organizing your money every pay day!

Let's use Sue as an example. Each month, Sue brings home $2,000 and is paid twice a month. She owes $800/mo for rent, $400/mo for student loans, and $300/mo for her car. Additionally, she's planning on visiting a friend across the country next year and wants to save $3,000 for the trip. At the start of the month, she has her sub accounts set up as follows:

  • Rent: 0/800
  • Student Loans: 0/400
  • Car Payment: 0/300
  • Vacation: 0/3000

Her first paycheck of the month is for $1,000. The day of, she organizes her accounts as follows:

  • Rent: 400/800
  • Student Loans: 200/400
  • Car Payment: 150/300
  • Vacation: 250/3000

When her second paycheck hits, she updates her accounts again:

  • Rent: 800/800
  • Student Loans: 400/400
  • Car Payment: 300/300
  • Vacation: 500/3000

With this method, Sue will never have to worry about spending her money on non-necessities to the point where she won't have enough money to pay for her bills!

Please note - this clearly doesn't take into account what her budget is for food, toiletries, and other basic necessities. This is an oversimplified example.

Too Long; Didn't Read: A summary of the article

Bank Accounts: Lump Sums Just Didn't Work
Lump sums make it very tempting to spend more money than you should, possibly making a disorganized individual short or late on bill.
Get It Together: Know What You Owe
Make a list of all of your expenses, including the dollar amount, to whom you owe, and when it's due.
The Importance of Sub Accounts
Sub Accounts, like the envelope system, allow you to allocate your money to different 'accounts,' keeping you organized.
What Sub Accounts Should You Include?
Your sub accounts should include an account for each fixed expense, variable expense, a short term emergency fund, and any short term medium/large expenses.
It's Pay Day! Now What?
Organize your accounts and allocate your funds on pay day so you do not become disorganized.

What do you like about your bank?

How are YOU doing? Do you like your bank, or are you looking for another? Did this article inspire you to change how you organize, or is this stuff that you already know? Leave a comment and start a discussion!


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