These 4 Accounts Can Make You a Millionaire
Common wisdom tells you to automate your savings with three bank accounts.
- A general spending account
- An emergency savings account
- A stock account
The idea is to have your income go into your spending account with a portion — usually 15% — automatically distributed to the emergency savings until it’s full and then to the stock account until you retire.
That’s an excellent plan, but it’s missing one crucial step.
What happens when you use the three account method
You need a lot of discipline to make the three account method work for you.
I used it for a decade, and every time I wanted to make a big expense that I didn’t have time to save for, I would have to pull out of the emergency account. It may seem that those out of the way expenses are what the emergency account is there for, but it’s not. Not always.
When my wife gets an unexpected two weeks off work, we hit the coast. We don’t always have this money planned, so it comes from the emergency account.
We have to slow down saving to our stock account while we refill the emergency account.
Misidentifying an emergency often leads to an emergency. That’s exactly what happens when the only place you have easy-to-access money is your emergency account.
It could be worse. You could buy a TV you didn’t need from your general spending account, making it impossible to pay some of your bills that month and putting you even further behind.
Add a fourth account to keep you on track
This saved my financial life and removed the stress of saving for emergencies and retirement.
I’m not talking about another savings account — you’ve got two of those already.
What I’m talking about is a second spending account.
Turn that general spending account into an expense account. Make it the place where the money to pay your bills gets dropped into, and use an automatic bill pay service to pay them (most banks have that function built-in).
Now, you have an expense account where you have just enough money to pay your bills, an emergency savings account funded up to a preplanned amount, and a stock account, where a percentage of your money goes every month.
The leftover money goes into a discretionary spending account.
You can spend from the discretionary account to your heart’s desire. It might be small or large every month, depending on your income, but here’s the thing: you can also decide not to spend from it.
If you don’t spend from your discretionary account this month, then it’ll increase next month. Eventually, you’ll have an excellent vacation option lined up without ever having to touch your emergency savings account or endanger your bills.
Having a bank account that I know I can reach into to spend keeps me sane when I want to buy a cup of coffee. I can check on account, see if there’s enough, and I don’t have to worry about where that money would have gone.
The money was allocated specifically for spending and was set aside in a separate account, so I wouldn’t overspend and dip into what I needed to pay my bills.
Stay organized by cleanly separating every type of spending into a different account.
- Expenses: the bills you have to pay to live
- Discretionary spending: the money you get to have fun with
- Emergency savings: for necessities you didn’t expect
- Stock savings: so you can one day escape this rat-race
Setting this up like this will let you see exactly what you can afford at any given moment and keep you stress-free when it comes time to drop some cash on a big expense.