Early in this series of mine, I posted a chart of my money flow. (You can click -->here<-- to go directly to the graphic.) I've talked about several of the accounts shown on that screen - mad money, travel, and misc budgeted spending. But I haven't talked about an account that I've had around the longest, makes the most sense, and has freed me from the tyranny of balancing my checkbook: my bills account.
This account gives me peace of mind more than any other I've ever had. The concept is so simple but I haven't run into too many people who have set their finances up this way. Not everyone needs it, but I think it's very handy for anyone who is ever concerned about not having enough in the bank to cover their bills.
The first step is to figure out what I pay in bills every month. Right now this is: rent, land line/internet, cell phone, electric bill, and auto & renter's insurance. Since some of those smaller bills are variable, I rounded them up by 10% to get a comfortable estimate of my monthly bills. Now every time I get paid I put half of that amount into my bill-paying account. For my bills that are set amounts, I have scheduled checks that are issued in a timely manner; bills that vary monthly get scheduled once I receive the latest bill.
In this golden age of internet banking, it's amazingly easy, but I've been doing some version of this since I graduated from college. It lets me know exactly where I stand and if I'm in any sort of trouble. I typically have the next month's rent funded by the middle of the previous month, so I don't have to stress about timing the mailing of the check to correspond with bank deposits. Nowadays I always have a little slush in that account, but I remember when I still lived in Boston, and I was living extremely lean. I discovered a math error in my bills account, and had to call my friend who worked at my bank and ask him to deposit eleven cents into my account in order to fully cover a check that had already been mailed. He gave me a quarter instead, nice guy that he is.
Having a bills account means I can spend what's in my day-to-day account without worrying whether it will affect my rent. I can sleep easily knowing that my next month's rent is already set aside. I can't even really remember what it felt like to live on $8.25/hour in Boston, and I have to say I'm glad.
So to sum up where we've been so far:
I get paid twice a month. The check is deposited in my day-to-day account. I immediately transfer most of it out to mad money, travel, misc budgeted spending, and bills.
What I have left to cover:
short-term savings, longer-term savings, my day-to-day account, and retirement savings. Exciting stuff, huh?
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