I’m not sure any of my grandparents had a bank account – except perhaps a savings account with a local savings bank or post office. Their working class economy ran on cash. The men brought their weekly pay packets home to their wives, who then extracted all the money that they needed to run the household before returning a little “beer money” to their husbands. It made sense to divide up the money between jam jars or pots for each purpose: rent, fuel for heating, housekeeping, clothing etc. This helped to make sure that the money needed for one purpose didn’t get spent on something else.
Now we think of “money” as the stuff in our bank account – virtual money that we can’t see or touch but which flows digitally in and out again via direct debits, standing orders, plastic cards and PayPal. The modern bank account is a technically impressive payment mechanism but entirely useless as a money management device. The best we can do is check the balance occasionally, which is about as useful as checking the level of the water on the harbour wall when you don’t know if it’s high or low tide.
So if you feel daunted when you look at your bank statement, the problem is not with you – it’s because of the way that the information is being presented to you. It’s almost as if someone is deliberately trying to confuse and discourage you by giving you too much information all in one go, in a long list that’s not sorted or categorised in any way. We’ve all met people who try to browbeat us like that!
But we can make our task a lot simpler and easier to cope with by sub-dividing this mass of raw data into separate piles. We can do this by setting up multiple bank accounts like the old-style jam jars, with separate “Jam Jar” accounts for different purposes. In fact the money we spend each month falls into two main categories:
- The stuff that’s pretty much fixed and goes out automatically: mortgage payments, rent, Council Tax, electric, gas, mobile phone, Sky, Spotify etc
- The money that we spend personally which isn’t for a fixed amount each month, which mostly goes on eating and drinking, including supermarket shopping, costa coffee, takeaways and all cash spending
We can dramatically simplify the management of our spending by using separate bank accounts, one or each type of spending:
- a BILLS account, for all the direct debits and standing orders (and your pay goes in here too). On average, this will account for between half and two-thirds of our monthly spending, and an even higher proportion of the number of entries on our bank statements.
- a SPENDING account, for all the rest. Once all the BILLS traffic has gone, there will be relatively few payments going out of your CASH account, so it will be much easier to see what’s going on.
- A SAVINGS account. I’ll talk more about saving in a later post.
It’s important to make this process as easy as possible. So it’s worth putting a little hard work into setting up your BILLS account and, if you don’t do this already, switching all your regular bills over to monthly direct debits. Once all the bill payments are going out on a monthly basis, it’s a simple matter to add up all the monthly payments, subtract that total from your monthly income, and figure out how much you have left each month that you can safely transfer into your SPENDING Account (and your SAVINGS Account). Now you can pretty much leave the BILLS Account to fly itself on autopilot, and concentrate on managing the money in your SPENDING account without being confused and distracted by all those extra bill payments.
Remember, we’re not trying to save every last penny, we’re aiming to make money management easier for “lazy” people like you and me. And just one accidental overdraft caused by a badly-timed direct debit that I forgot about could easily cost me £20 or more. So I smooth out the lumps in my spending as much as I can. I’m happy to leave it to British Gas to set my monthly budget payment, and to move this up and down occasionally. And I pay my car insurance over 12 months – yes I pay a little extra, but that’s one less lump sum that I have to think about how I’m going to pay it. Every time I switch a bill over to monthly payments, that’s one more bill that I’ll never have to worry about again – result!
Some banks are now offering Jam Jar Bank Accounts, and I’ll put more information on this in a separate post. But it’s easy to create your own, by turning your existing main bank account into a dedicated BILLS Account, and using a separate bank account (or a prepaid debit card, or good old–fashioned ‘cash in a jam jar’) for your SPENDING.
You may well be operating a version of Jam Jar Banking already. You may also operate additional accounts for other purposes, such as running your car. If so I’d love to hear from you – how does it work for you? What tips would you like to pass on? Please leave a comment by clicking on the word “comment” directly underneath the title of this post.