Monday, March 28, 2011

Complicating the System to Keep it Simple

I just made a major change to my financial plan that should, after the initial confusion, make managing my finances a lot easier.

I start my part time job in April. Because I won't have a set salary, my extra income will fluctuate depending on how many hours I bill for therapy. To complicate matters, the money will be added to my existing paychecks because I'm working for the same company in my full time job.

So I opened an Electric Orange checking account through ING Direct. No, I haven't fallen out of love with PNC Virtual Wallet. But I do have concerns about what this extra money will do to my budget. I can't really plan for it since the amount will be different each pay period. With my history, that puts me at risk for spending and/or wasting every dime of the money because it's "extra" or unaccounted for.

The new checking account will serve as my "fluff" money. I'll deposit a set amount each payday (I'm thinking $200) to spend on random stuff like books, gifts, clothing, restaurants, and going out. Everything else above my normal $1075 pay will go into savings in my Virtual Wallet account. I'll still use my VW checking for bills, groceries, and gas. My budget categories for restaurants/miscellaneous will go away.

There are several reasons why this is a good idea. First, I'll be able to separate optional spending from the money I use to pay for important stuff. No cutting it close when a bill is due. Second, I'll be able to limit my fluff spending to what's in the new account, so I won't have to budget as closely for random things I buy. Third, and most important, I'm giving my extra income a purpose so I don't waste it all.

I know some people are probably thinking, why not just save all the money? Believe me, I thought the same thing. But the money I save right now goes into my emergency fund, and I refuse to move it out for a non-emergency. If I start that, every bit of the money I've saved will be gone. Opening another bank account is purely psychological for me - I need to be able to spend a little, but in a controlled way. When that money is gone, the Electric Orange debit card will be put away until I get paid again. No more random spending from my VW account and potentially messing up something important.

It will take awhile for the new system to start, so I won't be able to judge its effectiveness for a few months. I feel good about my decision, though it will be a headache until I have the routine set up. I especially like the $50 bonus coming my way after I use the new debit card three times! I'll keep you all updated.


frugalforties said...

I actually have a very similar system myself. I have my paycheck split into 2 checking accounts: $300 goes to my "personal" account and the balance of the check, whatever it is after IRA and taxes and so forth, goes into my "bills" account. I also have a very low limit credit card ($200) that I use for most of my personal spending. Every payday I pay off the cc out of my "personal" account. I can also draw cash from that account for those situations where I can't or shouldn't use my credit card.

I've found it helps me a lot to actually physically separate my personal spending from my regular bills. It's really just mental/psychological, but that barrier of "this is the account I pay my bills from" really helps me to not spend extra money. It's also allowed me to build up a little bit of a buffer in my "bills" account so that I don't run the risk of missing an automated transaction somewhere.

Andrea said...

Wow, I'm so glad to know someone else is using a similar method to keep things organized. I'm also glad to know it's working for you! I really hope I'll be able to spend money more wisely this way.

Julie @ The Family CEO said...

I love your plan. I'm a big believer is assigning income to different things, like you've done.

I also love the name of your blog. When I saw it I had to click through to check it out.

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