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By Robert Frick | January 28, 2021  

Making a budget is a tried-and-true method to track expenses and avoid debt, right? Not so fast. Often I’ve seen struggles with traditional budgeting because it’s inaccurate and can be tough to keep up with. This is because that style of budgeting involves making long lists of where you spend money—a list that changes month to month. On top of that, humans are often too optimistic about our own self-discipline. For these reasons, many of us get frustrated and give up.

But there’s an alternative to traditional budgeting that a new study has shown to be simpler and works better for many.

It’s the Two Checking Account System:

  • One for fixed expenses
  • One for money left over

What Are Fixed Expenses?

Fixed expenses are recurring payments you have to pay in order to avoid late fees, service cancellations, credit dings and additional debt. These include things like:

  • rent or mortgage payments
  • utility bills
  • prescription and medical care costs
  • debt payments (e.g., credit cards, auto or personal loans)
  • child care
  • car insurance

To understand how much money should be in this account, make a list of monthly, quarterly and semi-annual fixed expenses.

The next step is to maintain that amount in the account each month to ensure these bills are covered. My recommendation: set up automatic payments from this account for these expenses to ensure payments are never late.

What Do I Do With Money Left Over?

Money beyond those fixed expenses should be split between the second checking account (to cover discretionary costs—e.g., groceries, dining out, entertainment) and an emergency savings account (we’ll explore this below).

How Do I Get Started With the Two Checking Account System?

First things first: set up the accounts. At Navy Federal, it’s easy to set up more than one checking account—open one online or follow these steps from mobile banking:*

  1. From More, select Products & Rates
  2. Select Checking & Savings, then choose Checking
  3. Choose the best account for your needs and click Open Now

If cash withdrawals are part of your discretionary spending, I recommend selecting a checking account that offers ATM fee rebates.

Next, I suggest naming the accounts. This actually works to help keep us disciplined. Maybe the fixed expenses account is named “Bills,” and the discretionary account is named “Everything Else.” Consider labeling emergency savings accounts, too. “For Emergencies” will do.

Then automate the deposits into each account. If it’s automated, it takes no effort and that will help you stick with the system. There are a few ways to do this. One is direct deposits into each account; another is direct deposit into our fixed expenses account, and an automatic deduction into our discretionary account.

You’ll need to check and adjust these accounts occasionally, though not nearly as much as if you line-itemed every expense. For example, if there’s extra money in your discretionary account every month, you can decrease what you contribute to that account in favor of putting more in savings.

Why Does Something So Simple Work?

To start, people tend to overspend, leaving them unable to cover their must-pay bills. By having a dedicated discretionary expenses account, you can make better choices about how much you spend on things like entertainment compared to dining out or travel.

This is because you can see that pot of money as smaller and separate, so it’s easier to conserve. That’s especially true when funds in it start to run low. At the same time, we naturally put money into different “mental accounts,” so the Two Checking Account System helps us keep those mental accounts separate from actual accounts.

What About Emergencies?

I mentioned earlier that in addition to having two checking accounts, you should also set aside funds in an emergency savings account. This way, you’ll have the money you need on hand to cover major expenses like car repairs or vet bills that your discretionary expense account won’t cover. Making this an automatic transfer from the fixed account is best.

Robert Frick is a corporate economist for Navy Federal Credit Union. You can follow him on Twitter @RobertFrickNFCU.


This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.