This Simple Financial Advisor-Approved Trick Can Help You Save Money and Stick to a Budget

Writing about self-improvement has taught me a lot of things over the years, especially when it comes to bettering my financial health. Whether I’m researching tips on how to pay down debt or ways to reduce monthly expenses, there’s one piece of advice that financial advisors consistently offer up that I’ve used to improve my own financial situation.

Opening a separate banking account, devoted solely to your obligatory expenses, such as rent, bills, and loan repayments, is an easy and effective way to stay on budget, and possibly save a little extra money every month. “Having a separate account dedicated to essential expenses allows you to set aside funds on an ongoing basis with the understanding that you won’t dip into that money for any other purpose,” financial advisor James Bell of Northwestern Mutual tells Apartment Therapy. “The distinction between the funds needed to pay your bills, and what you have left over, helps provide a clearer picture of your discretionary spending habits — which is where most people struggle with sticking to a budget.”    

This tried-and-true financial trick has certainly helped me keep my nonessential spending under control and save some money every month. Here’s how it works: 

1. At the beginning of every month, I deposit a set amount of funds (based on the average sum of my bills) into a designated checking account to ensure I always have enough to cover my obligatory expenses. 
2. Whatever funds are left over go into a separate banking account for nonessential spending, that I can use to treat myself to dinner deliveries, a new pair of kicks, or an extra credit card payment if I’m feeling extra ambitious.

Either way, I never miss a payment and am often left with extra cash at the end of the month — which always feels like a huge financial triumph. 

Interested in learning more about how to incorporate this financial advisor-approved tip into your monthly budgeting routine? From determining what expenses should be considered obligatory to setting up automatic transfers and more, here’s how financial planners say you can save money by opening a separate bank account for essentials.

The first and most important step to implementing this financial trick is to set up (or designate) a separate checking — not savings — account. “Savings accounts generally have a six transaction per month limit, so it’s generally not an ideal account to be used to pay bills,” explains Grace Peng, a financial planner at Prudential. “I recommend speaking with your banker to learn about the requirements and types of accounts that could best support a budgeting strategy like this to avoid fees and penalties.”

To ensure you won’t dip into this account for any nonessential needs, Bell suggests setting up your bill-dedicated account at a different bank than your primary checking or savings. “This way, it won’t be as tempting (or easy) to transfer or withdraw funds from this account,” he explains.

After you’ve secured a separate banking account, it’s time to figure out which of your monthly expenses should be deemed essential. “Obligatory expenses are usually ones with a standing agreement to a third party, such as rent/mortgages, utilities, cell phone bills, car payments, and debt and loan repayments,” says certified financial planner Kristen Euretig of Brooklyn Plans. “These commitments are funded by money that may be sitting in your bank account, but in reality is already spoken for.”

In addition to rent and bills, Joy Liu, a financial trainer at The Financial Gym says day-to-day living costs such as child care, Netflix subscriptions, and meal plan service subscriptions should also be considered essential expenses. “Typically, any monthly expense with a set dollar amount and a predictable payment date should come out of this designated account,” she explains.

Once you’ve identified your essential monthly expenses, Peng recommends setting up direct deposits into your designated account to cover the total amount. It’s also useful to keep a slight cushion in the account at all times, to avoid accidentally overdrafting the account.  For example, I always keep an extra $100 in my account to cover any fluctuating payments, like my electricity bill, and whatever I don’t use can just carry over to help cover the next month of expenses. 

 “Automatic transfers can be set up either through direct deposit with your employers, or through your bank online,” Peng explains. “Whether you transfer the total amount as a lump sum at the beginning of the month, or arrange for a set percentage of your biweekly paychecks to be deposited directly, you’ll know exactly how much money you have left over that month for discretionary spending.”

You can also automate your bill payments to come straight out of your designated account to ensure you don’t dip into your essential funds or waste money on unnecessary overdraft fees. “Just make sure that the payment deduction dates align with deposit days, so you’re always covered,” Liu advises. “Many lenders will allow you to adjust payment dates over the phone if they don’t offer the option online.” 

Along with helping you meet all of your monthly financial commitments, Liu says the biggest payoff for opening a separate bank account for obligatory expenses is that you can keep a closer eye on your discretionary spending habits.

“Most of our budgeting energy is spent on managing our nonessential spending, like clothes shopping, gifts, and entertainment costs,” Liu explains. “When nonessential expenses come out of the same account as your automatic bill payments and deposits, it can be hard to keep track of how much discretionary spending money you really have.” 

To keep better track of your discretionary spending habits and potentially save money, Liu recommends using an app like TracKit to manually log all of your nonessential transactions. “For most people who bank online, money has become very intangible,” she explains. “Tracking each and every purchase you make gives you clarity about where your money is going, and what you might not really need to be spending it on.”