Photo by Carlos Muza on Unsplash

How to manage your financial accounts when you have inconsistent income?

How to manage your personal financial accounts can be incredibly confusing. This is something that causes many people to just have everything go into their checking account because they do not want to deal with it.

However, putting all of your money in your checking account may cause you to overspend or not manage your funds as efficiently as you can. So, let’s break down a way to keep things in check.

Breaking out your finances into a few different buckets will help to make this easier and keep you on track of reaching your goals. The first step is to create a budget so you know how much needs to be kept in each of your accounts. You can find out how to build a budget here.

Next you need to get in touch with your bank to find out if there are any minimum account balance requirements or other things you need to do to keep your account from having a fee. If you are in accounts that charge you fees just to have the account, it is time to review your options and change where you bank. With all of the online options out there, you should never pay a fee for your bank accounts.

Once you have your budget written out and determined any minimum account balance requirements you can split your money up appropriately. The way to maximize how much your money will work for you is to split it between a checking account, savings account, and brokerage account with all of your spending done on a credit card. If you are not a fan of credit cards, don’t worry, you can use a slightly modified approach below.

Let’s look at how each of these accounts would be handled. Each account will have a running balance based on your monthly budget, and there will be automatic transfers taking care of moving the money for you so that you do not need to think about your finances.

The Checking Account

Your checking account should maintain a balance equal to one month of your total budget. This is where all of the money that leaves your accounts comes out from, which will make it easier for you to track things when the time comes. However, no deposits are to be made directly to your checking account. Each of your bill payments should be setup to automatically debit your account on the payment due date for the balance due. The automatic payments can be set up either directly with the vendor or through your bank’s online bill pay system. All of your credit cards should be setup for at least the minimum monthly payment to be automatically debited from your checking, this way you will not need to worry about getting a late fee or penalty interest rate on any credit card.

The Credit Card

Any of your spending that is not a core bill should be done on a credit card. It can be very helpful to have 2–3 credit cards to separate spending based on whether it is a tax deductible business expense, daily life spending, or a card you only use when you are traveling. Having a separate card for traveling also helps you to easily differentiate the travel expenses and allows you to rest easily so that you will not have to make significant changes if someone steals your credit card information while you are overseas.

Spending on credit cards is also especially helpful when you are reviewing your budget each year because your card will typically give you an annual statement that separates your spending into categories making it easy to track your spending.

Alternative to spending on a Credit Card

If you are worried about overspending or do not like to use credit cards you can open a second checking account with a nickname of “Spending”. You will then have all of your core expenses go to your primary checking account and have any discretionary/food/transportation spending go to your spending account. It is important to disable overdraft protection on your spending account so your bank will decline your debit card instead of pulling money from your other accounts.

The Savings Account

Your savings account will be the heart of your financial picture. This is where all of your deposits will go and where the bulk of your liquid cash will be held. Your savings balance will vary based on your personal preferences and financial situation. The minimum amount to keep in your savings is 3 months of your budgeted expenses with a maximum of 24 months of your budgeted expenses.

Each month your savings will automatically transfer one month of expenses to your checking account. This will essentially give you a paycheck that covers all your core expenses and keeps you spending within your budget. It will also keep your financial flows consistent.

If your bank allows you to set an automatic transfer based on account balance, you can set it to move funds to the brokerage automatically as soon as the savings balance exceeds your desired reserve balance + 1 month of expenses. If you cannot set up the automatic transfer based on account balance then you will need to manually transfer funds to your brokerage account. It is recommended to do this either monthly or quarterly, which may require a calendar reminder on your part.

The Brokerage Account

This will be where the majority of your financial growth will occur. Your brokerage account will hold all funds beyond your reserve balances in the checking and savings accounts. Ideally your brokerage account will be invested in an index type fund to allow you to focus on just adding to the brokerage account and not having to regularly monitor your investments. In a best case situation you will only be adding to your brokerage account and never taking money out until you retire or are making a major purchase like a house.

The Wrap Up

If you follow this plan it will keep your financial life simple enough to be incredibly effective while also allowing your money to work for you and keeping you in line.

Let me know how you manage your finances in the comment section below.

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