Set a budget and stick with it. That's the advice that's been pounded into our heads as a golden rule of personal finance. But for many people, creating a budgeting plan is overwhelming, and following it is an even harder task.
As a financial analyst and host of the podcast Popcorn Finance, I get to hear about the effective strategies people use to make budgeting easier.
What is the High-5 Banking method?
True to its name, the High-5 Banking Method involves holding what Pierce calls the "perfect number of banking accounts" — two checking accounts and three savings accounts.
The goal is to track individual budget areas in your accounts rather than in a spreadsheet, all while establishing a routine of transferring money to separate accounts each payday.
"When we teach kids how to count, we start with the basics of counting fingers from one to five, then move on to six to 10," says Pierce. "I wanted to make it that easy for us to remember how many bank accounts you need: just look at your hand."
Each finger represents either a checking or a savings account:
1. Bills checking account
This is for mandatory expenses, which typically take up a large percentage of your income. But not paying them can quickly affect your life and your credit score.
- Housing: Rent, mortgage, property tax
- Debt: Credit cards, auto loans, student loans
- Utility bills: Electricity, water, cell phone, gas, internet
- Groceries: This does not include eating out
2. Lifestyle checking account
This is for all your "wants." Transfer a set amount of money into the account each payday to cover whatever brings you joy. Once the account reaches zero, stop your spending until your next deposit.
- Personal care: Hair salon, spa days, gym membership
- Home essentials: Paper towels, toothpaste, detergent
- Entertainment: Movies, subscriptions, hobbies
- Eating out: Restaurants, food delivery, bars
- Miscellaneous: Shopping, fun outings
3. Emergency fund savings account
This financial safety net is reserved for potential future mishaps and unexpected expenses. Most experts recommend keeping at least three to six months' worth of living expenses.
- Medical emergency: Surgery, illness
- Job loss: Getting fired, laid off, suspended
- Home repairs: Leaky roof, plumbing, severe weather
- Car issues: New battery, accidents
4. Long-term goals savings account
We all have big dreams with a big price tag. This account allows you to easily track progress over time and allocate money to any goals that will take longer than 12 months to reach.
- Down payments: New car, house
- Big travels: A family trip abroad
- Wedding: Rings, ceremony, reception, honeymoon
- New baby: Childbirth expenses, fertility treatments, adoption
5. Short-term goals savings account
The fifth and final account is for short-term goals that you want to reach within the next one to 12 months.
- Upgrades: New phone or laptop
- Special gifts: Christmas, Mother's Day, Father's Day, birthdays
- Small activities: Cruises, road trips, sporting events, concerts
- Annual expenses: Car registration, car insurance, bulk purchases
Start where you're at
You don't need to open all five accounts at once, says Pierce, especially if you don't have the financial means.
You can start with the three most important ones — bills, lifestyle and emergency fund — and then work your way up as you're able to contribute to different savings goals.
A few other tips Pierce recommends keeping in mind:
- Try not to keep all your accounts at the same bank. In case technology fails at one institution, for example, you have accounts at other banks to fall back on.
- Take advantage of free budgeting apps that allow you to connect all of your financial accounts, including your retirement accounts.
- Only open accounts that make sense for your situation. For example, if you don't have any long-term goals right now, don't force that account until you're ready.
- Consider automating your savings in a high-yield online savings account, which can pay better interest rates than your typical institution.
Chris Browning is financial analysis and creator and host of the award-winning podcast Popcorn Finance. He holds a bachelor's degree in finance and also works as a financial analyst specializing in revenue analysis. Follow him on Instagram.
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