The Three Account Method of Automating Your Funds

Continuing the theme from Monday, this is a companion piece (this time posted well after the fact) from last week’s Worst of the Free Financial Advisor podcast.  I blather on and on about automating your finances… not because it is one of The Ten Commandments of Personal Finance writing, but because I actually think it is a good idea.

People telling you to automate your finances abound, yet few people explain what that really means.  Let’s put pen to paper (or fingers to keyboard) and flesh out how a single renter making $50,000 might divide their funds.

The three account method is a stunningly simple way to automate your finances that only requires a bit of algebra.  In essence, you divide your paycheck into ‘fixed expenses’, ‘variable expenses’, and ‘savings’ and separate those into their own ‘pot’, in the form of a bank account.


I’m obviously making this example ridiculously simple.  Note that contributions to retirement accounts, insurance, stock purchase plans, and other deductions might come out of your paycheck before you even have an opportunity to set up the three account method.  This method still applies to the money which you ‘take home’ after those deductions.  Sidebar over; back to the article.

Brief Diversion into Math

Let’s say Mary is a single renter living in a middle of the road tax state – like Nebraska.  Let’s say that Mary gets paid for her job as a data entry technician every two weeks.  A quick jaunt over to Paycheck City reveals that she takes home approximately $1,923.08 every two weeks, which whittles down to $1,514.71 after taxes.

Her apartment costs her $900 a month, and she has a $150 car payment and $75 in student loan payments along with $20 in Renter’s Insurance, $200 in utilities, and a $50 prorated share of car insurance ($1,345 in fixed costs).  She spends somewhere between $800 and $1100 a month on here credit cards – between food for her and her cat Furball, clothes shopping, and various other shopping trips it’s impossible to know for certain (We take $1,100 to be safe).  We’re now ready to set up the Three Account Method!

The Three Account Method

Like many folks, Mary doesn’t have anything approaching an emergency fund.  She has $700 in a savings account.  Knowing that she spends around $2,445 a month ($2,145 in a lean month), we’d like to see that amount equal to at least $7,000.  With $6,300 to go, her finances will be a lot better after we implement the TAM, so Mary edits her direct deposit like so:

Account #1 (Checking): $672.50 per paycheck (let’s round to $675)

Account #2 (Checking): $550 per paycheck

Account #3 (Savings): Balance of Paycheck, or $289.71

Errors in Spending?

It happens… you likely overspend in some months, say a month with lots of birthdays or December.  If that’s the case, you can temporarily make up the gap from Savings, and re-implement the strategy fresh in the next month.

Extra Paychecks?

The TAM is based on a monthly payment schedule, but you probably receive 26 or 52 paychecks in a year.  If that’s the case, deposit the entire ‘extra’ paycheck in savings.  So, for theoretical Mary, after one year she would have put 26 * 7,532.46 + 2 * $1,514.71 = $10,561.88 into savings, well past her goal.

Goals Reached?

Simple.  Take money from savings, put it in retirement accounts.  This could mean ratcheting your 401(k) contribution higher, contributing to a Roth or Traditional IRA, or (if those are capped) some other form of savings.

Easy, yet effective.  Automate your finances today, and as a side benefit you’ll see ideas to cut down your expenses further.  What are you waiting for?



  1. says

    This is way too practical to be a DQYDJ post – I was waiting for an article on the distribution of pet reptiles for different amounts of annual income. LOL.

    One thing I’ve realized about automation is that it is really great for people who have a stable salary, but often “too much to think about” for people who have variable salaries.  For example, friends I know would never start a budget because they never know how much they’ll make from one week to the next.  Obviously that’s a good reason to start caring about a budget, but a big speed bump to making one and using it.

    I actually use a method very similar to this.  I call it my cash flow waterfall, and let funds fill into my fixed expenses, before the remaining goes to variable expenses, then the balance into savings.  Savings is promptly divided between cash savings – or, if I’m feeling like the market is cheap, into my portfolio.  It’s virtually fool proof, and it definitely works.

    • says

      Dante forgot to mention it, but the 10th circle of hell is actually reserved for Personal Finance writers who avoid writing articles on pet reptiles. I need to do some research on that one…

      Agree completely – this is a great method for those people who get 26 or 52 or some other stable number of paychecks a year. It takes a lot of work for you to fit it to a variable income.

      Of course, even a stable salary will toss all sorts of wrenches into the machinery – like bonuses and other reasons when you may receive ‘extra’ cash. I guess the answer is anything extra goes into savings, and when that fill sup? Invest.

  2. says

    I enjoyed this on the podcast and again here. I really like how you made up a hypothetical to illustrate. I haven’t done one of those in a while.

    Did you come up with this system yourself? Do you really use it?

    • says

      I did come up with it – but it wasn’t like I woke up in the middle of the night and dashed to work to set it up. It’s something that evolved organically, then one day I said, “Hey! People might use this!”.

      I literally did that exact method at one point, but mine is a little more complex now – more accounts and movement. I didn’t want to confuse people too much while trying to explain it, however.

  3. says

    I’m a big believer in automating your finances, too many positives not to do it. The thing I like most is that once you setup your transfer to savings (based upon a budget), it forces you to stick with your plan.  Much easier to reach your savings goals that way. Have to say PK kind of disappointed we didn’t see a chart on this one. 😉

  4. says

    It was very interesting to read about your budgeting method for automating your finances. I do a lot of what you said, but I have software that allows me to “separate” the funds without having multiple banks accounts. Thanks for the good read!

    • says

      Yeah – that’s another option. As long as you can find separate ‘pots’ to divide your cash into you’ll be all set with this method.

      Did you find it made maxing your Emergency Fund easier? Any disadvantages you noticed?