While the principals listed in Part I of this blog post stand the test of time, we still need a good system to guide our daily saving and spending decisions.

This money management system was popularized by T. Harv Eker in his book Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth. I attended his training in 2007. T. Harv Eker has a provocative approach, which some people get triggered by. I could look beyond that. I felt that his training and financial system were excellent. I implemented the system shortly thereafter and have been very grateful ever since.

Here It Is

Rather than writing down your expenses and tracking them each month, this system invites you organize your money across six different accounts. Whenever you get paid, you place a certain percentage of your income in each account. Then you pay for your expenses based on how much money you have in each designated account.

You can open up six different bank accounts or, alternatively, you can use jars (great for kids), or you can use these categories in managing your money in your personal budgeting software like Excel or Quickbooks.

A Snapshot

Open 6 bank accounts.
Give them each a name and a spending purpose, as described below.
When you get paid, transfer your money to each account according to the recommended percentages.
Pay for your expenses out of the correct account.

Why It Works

It works well because it follows the principals of wealth building:

It tells me when I need to earn more and spend less.
It encourages me to invest and save at the percentage that financial planners would recommend.
It covers me for the inevitable unplanned expense.
It encourages me to have fun and reward myself.

More Detail

These are the accounts, their names, and the % of after-tax money you should put into each one, during each pay period.

Necessities 55% -- use this account to pay your mortgage or rent, car payments, groceries, utilities, gas, internet, cell phone, health insurance. The necessities.
Financial Freedom 10% -- use for investment accounts such as your 401(k), IRAs, or investment properties.
Long-term savings 10% -- use to fund large or unplanned expenses, such vacations, car repairs, major house repairs, etc.
Fun 10% -- use to pay for having fun like special dinners, massages, gifts, and luxuries.
Education 10% -- use for student loans, continuing personal development, and saving toward children’s college education.
Give 5% -- use for giving back or investing in others- however you relate to the concept of tithing.

The easiest way to fund each account is to deposit your income into your “Necessities” account and then transfer money to the other accounts through online banking. I do this every time I deposit a check. It is a very satisfying exercise. I watch the savings accounts grow and I feel empowered. I watch the necessities account cover our basic expenses and I feel in control.

A Few Keys

1- Money should not be commingled. That is, you cannot borrow from long-term savings to fund a dinner out. Rather than co-mingle, withhold from spending money until you’ve deposited enough in the account you want to pull from.

2- Never pull money out of your “Financial Freedom Account”, except to direct it to an investment. This is a powerful wealth building principal: saving and investing over time should never be compromised. Consider that a $5000 placed into a 9% investment account will grow to $28, 221 in 20 years. More compelling is that $50,000 at 9% will grow to $280,221 in 20 years.

3- Your “Fun Account” must be spent on a regular basis. Arguing that most budget plans fail because they create a spending plan that is too tight for comfort, Eker says that fun money cannot accumulate for more than 90 days. Think of spending money on yourself as both a reward for saving in other buckets and as a means of re-energizing yourself to save more. You’ll enjoy meaningful luxuries that allow you to feel abundant and well-taken care of, not constrained and meager.

4- “Long term Savings Account” prevents debt by anticipating large expenses. This account came in handy when my car needed an unexpected $1500 repair. I simply pulled it out of this account and I never felt a bump in my budget. When we wanted to take a family vacation we pulled money from that account and felt free to spend what we had- no hesitation, no stress, and no debt.

Customizing This System to You

In discussing the account concept with clients, there are some common reactions. Most notably, some say that they spend more than 55% of their income on necessities. Given the high cost of living in certain parts of the country, surviving on half of what you make may not be possible.

Naturally, you can adjust Eker’s percentages to reflect your own circumstances. For example, if you need 65% for necessities, you might drop education, charity, and long-term savings to 5%.

Accumulated debt can also affect the percentages. If you have significant debt, you may need to direct more than 50% to your “Necessities account” in order to help you dig out of that hole as soon as possible. Once you are out of debt, your “Long-term Savings Account” can help you stay debt-free. In that sense, your “Long-term Savings Account” can also function as the traditional “emergency account.”

Although this plan is adjustable, you are encouraged to at least consider the possibility of living on 55% of your income. Covering your basic living costs with 55% of your income can help you to start to prioritize your expenses and think more proactively about your expenses.

In fact, quite a few clients have come realize that they were living in a house that was too expensive for them. Some of my clients have asked for, and received, raises that allow them to live off of 55% of their income. Other clients have found higher paying jobs. In our family we both curbed our spending and created businesses that allowed us to comfortably cover our necessities with 55% of our income.

If you are considering implementing the multiple account system, it's suggested you keep in mind another piece of advice from T. Harv Eker. He believes that what we focus on expands and grows. Accordingly, he suggests that for at least seven days after implementing any financial self- improvement plan that you do absolutely no complaining – not out loud, not in a whisper, not even in a passing thought.

The positive energy you create – in combination with a sound approach to budgeting – may be just what you need to move further down the road to financial freedom.