In her Little Black Book, Otegha Uwagba encourages a 50/30/20 rule of thumb when it comes to managing your personal finances.
That is: No more than 50% of your post-tax salary should be used to pay the essentials like the mortgage or rent, utilities, food and transport. Basically, the ‘stuff’ that gets you from one month to the next.
20% should be for financial obligations like debts, loans, pensions and should include building on your savings.
The other 30% is for the fun stuff you can do in the month; buy new clothes, go to the movies, go out to dinner or for cocktails with the girls, top up on your beauty products etc.
To us, this seems like a pretty simple and good advice for managing your money. But when your salary is lumped into your account and the same account manages your bills, day-to-day spending it can be a little challenging to keep track of. This is where having multiple accounts can be helpful.
We think that having up to 3 current accounts and 2 saving accounts works best. We show you why…
You got bills, you gotta pay
This account should be the account where your salary and any other income should go, especially if its paid in routinely. Also, this should be where your bills and other financial obligations come out. Hopefully you already have a good indication of what you expect to come in and what should be going out. If not, there is no time like the present to get organised.
We’d recommend a simple spreadsheet that includes the following fields:
Details of what that is: rent/mortgage, water, phone, gas, electric, loans, car, insurances, Netflix etc. (what)
- How much you pay out each month (£)
- The date that payment comes out (27/03/2019)
- When that is due for review- to allow you to shop for the best prices or see when more money could be freed up (27/03/2020)
- The name of the provider and possibly some contact information and reference numbers (e.g. Netflix)
- Any additional comments.
Be sure to have a total at the bottom to help you see the total you’re paying out each month- if you’re concerned by the total, look at ways in which you could possibly save money, like using comparisons sites to get the best deals on your utility bills.
Seeing your money in this way will make it easier for you to evaluate your financial position and take action timely to save yourself money in future.
Once you’ve accounted for your bills, it’s time to move your money into one of the following accounts:
Money, Money, Money
You can use a second current account to use as your spending account. This should be your 30% where you can spend your money on whatever you like. But once it’s gone, it’s gone.
If you feel a bit like a loose cannon when you’re handling a lump sum in this way, an easy access account to split the money, may help you to manage it:
Just Got Paid
You’ll want an easy access/current account for this one too. This is an account you can put all of your extra money into after the 50/20 rule and transfer it into your spending account as and when you need it. This is particularly helpful when it comes to your fuel and food allowance for the month, in addition to the fun things you can do. It’ll help you to manage your money better when you’re out and about and hopefully rein in the spending.
Any extra you have left over, you can pop into a savings account.
Rainy Day Fund
There are lots of banks that offer low commitment, often free, easy access accounts for your saving pots. These accounts are best for the rainy-day funds. A rainy-day fund should have enough in it to cover emergencies: if your car breaks down, the boiler packs up, the washing machine breaks etc. You should aim to save a few thousand in this pot.
As you shouldn’t be dipping into it very often, you will benefit from a little boost of interest every year. It won’t be very much, but every extra helps.
You can put away up to £20,000 into a cash ISA without incurring any tax. You’ll still only benefit from a little boost of interest every year of between 1.4 – 2.5% with most providers but again every bit helps.
For this account you want to aim to save between 3-6 times your monthly salary. This is the ultimate rainy-day fund that should provide a cushion should you lose your job or be unable to work for a lengthy period of time. This will give you peace of mind that you could cover your outgoings in the event of a drastic change in circumstance, giving you some room to breathe.
We hope these tips will help you to manage your money better and allow you to pay your bills (and potentially save a bit along the way), manage your spending money effectively, and help you to store a little for the times you’ll need it most- your rainy day funds will help those normally stressful occasions, seem a little easier to manage.
In addition to these accounts, you may also consider additional savings accounts which can help your money grow as it can sometimes entail a greater commitment but ultimately the potential for high rewards. Don’t forget to check out our other Money Matters features for lots more inspiration.