How to Stop Living Paycheck to Paycheck: Try This 3-Account System Instead

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If you’ve been searching for how to stop living paycheck to paycheck, this isn’t a budgeting post. It’s better than that!

I can’t tell you how many times I’ve started a new budget, only to have life happen and be back at square one the next month or even the next week.

Here’s the deal- budgeting is a willpower system, and willpower will only get you so far. Money management, just like other goals, will fall to the success of your systems (or lack thereof). 

I often ask myself this question- what could I maintain on my worst day? This applies to so many areas of life in addition to money- fitness, parenting, relationships, etc.

My experience managing money completely changed once I adopted the 3-account system. It’s simple, automatic, and relies on zero tracking to be successful.

Easy button? Yes please.

Why Budgeting Fails Most Women

Most women searching for a way out of the paycheck to paycheck cycle assume budgeting harder is the solution. 

Now don’t get me wrong, a budget can serve a purpose. Understanding where your money is going is important and could be a one time or regular exercise that is meaningful for you.

I personally do have a budget, with a specific purpose in mind, but it’s not the system that moves the needle on my finances.

Budgeting as a recurring activity assumes you have time, energy, and mental bandwidth to track every dollar.

As single moms, corporate women, caregivers- we are already running on empty. Budgeting systems require daily decisions and let’s be real- decision fatigue is real.

If you were to peep my personal google drive right now (buried in an ‘Archive’ folder somewhere), you would find all of the budgets of past Jessica. A collection of artifacts representing abandoned decisions, optimistic intentions, and aspirational over-rotation.

What I’ve learned and what I’d like to pass on to you is this- the problem was never your discipline. The problem was the system.

How the 3-Account System Works

Without further ado, allow me to walk you through the system that has simplified my finances.

The way it works is just like it sounds- three accounts, one rule, money moves automatically into the accounts. That’s it. 

If you’re anything like me, you have questions so let’s dive into each account individually…

Account 1 — Bills (fixed expenses)

The first account is for any bills that do not change month over month such as your mortgage/rent, utilities, subscriptions, etc. Account 1 should be a checking account.

Add up all of your fixed expenses for the month and this is how much money (at a minimum) needs to be deposited into this account each month to cover your bills. Account 1 should have a fixed deposit amount.

Now, I had a lot of internal drama when defining what I would categorize as a fixed expense.

Depending on what corner of financial advice you find yourself in, you may see variable expenses categorized as a fixed expense. Example- groceries.

Is it not true that food is a ‘fixed expense’ because you need it to survive??

So the simple use for this account is only bills that are truly the same month over month. For me, this currently includes:

• Rent
• Utilities
• Debt minimum payments
• Car payment
• Insurance
• Subscriptions

Account 2 — Your Future (savings/financial goals)

The second account in this system is for money you are allocating towards financial goals. Account 2 will be a high-yield savings account (HYSA).

Priorities will vary here but may include: saving for an emergency fund, debt payoff, post tax investing, saving for a vacation, etc.

The reason I have this listed as account 2 (and skipped right over variable expenses) is because you have to prioritize this before spending if you want to make progress on your financial goals.

For a long time, YEARS really, I would pay my bills, spend without a plan on variable expenses and then use whatever was left for financial goals. This was totally backwards.

In order to start actually seeing movement on my financial goals I had to start allocating money to my goals first.

This seems like common sense but for a lot of reasons, that I can get into in a different post, it was not. 

So how much do you decide to allocate towards this account? If you look at your financial goals, you may see a giant amount and try to make that happen.

The key to making this work on auto pilot is to choose a percentage of your take home pay. Choosing a percentage takes the guesswork and decision making out of this process.

You will find varying percentage recommendations in the personal finance world. As I am not a financial planner, I will not make a recommendation to you of what yours should be.

I will, however, share that 17% of my current take home pay is allocated to financial goals. My top financial goals right now are:

1. Increase my emergency fund to 3 months (I’m so close to achieving this!)
2. Pay off my consumer credit card debt

I would love to increase the amount of money I am allocating towards financial goals and plan to do so as I pay off debt/earn more.

Account 3 — Spending (variable expenses)

The third account is for any variable expenses that change month over month.

For me this includes necessities like groceries and gas. It also includes any miscellaneous spending such as eating out, going to the movies, or this month- sending my teenager kids random amounts of apple cash.

Account 3 is a second checking account. The amount deposited in here is what’s leftover after the deposit/transfer to accounts 1 and 2.

Having an account with spending money has been so freeing to me. There isn’t always a ton of money in here but I have zero guilt when I spend from this account.

I know I am meant to spend this money before my next pay day. 

How to Set It Up This Week

Now, if you’re anything like me, it might take some time to wrap your mind around this simple system. Once you’re ready, it’s very simple to set up:

1. List your fixed expenses and total them up
2. Decide your “future” percentage (see further instructions below)
3. Open a second checking account and a high-yield savings account 
4. Set up automatic transfers on payday
   • You can either set this up from the account your paycheck is deposited OR you can set up direct deposits to each account directly with your employer (this is how my paycheck is set up)
5. Whatever lands in account 3 is yours to spend, guilt free!

Additional instructions- percentage for financial goals

To determine the percentage to dedicate to your financial goals, first estimate the percentage of your take home pay going towards fixed expenses. 

Then you know what percentage of your take home pay is available to split between financial goals and variable expenses.

Once you have determined the percentage you are targeting, calculate the dollar value the percentage represents.

Example:

• Let’s say your monthly take home pay is $5,000 after taxes and your fixed expenses are $3,000
• Your fixed expenses are 60% of your take home pay ($3,000/$5,000= 0.6)
• This means you have 40% of your take home pay to split between financial goals and variable spending
• You choose to allocate 10% of your take home pay towards financial goals ($5,000*.1= $500)
• The fixed amount you will transfer to a HYSA is $500

The one rule for this system is that the deposits/transfers to each account happen automatically each time you get paid. 

This system works because you don’t have to think about it- the automations work for you and match decisions you already made.

How This System Helped Me Stop Living Paycheck to Paycheck

I’ve been using the 3-account system consistently for almost a year now. Prior to that, I had several different checking and savings accounts that required a lot of manual moving around of money.

I often forgot to move money or forgot why I moved money. 

On top of the chaos, I wasn’t really making progress on my goals. I had an emergency fund but it was not enough to cover even half a month’s worth of expenses. 

I spent first, before directing money towards financial goals. It didn’t matter how much money I made, I was just on a hamster wheel.

Since implementing the 3-account system last fall, I am less than 3 months away from having a fully funded 3 month emergency fund. I’ve paid my credit card debt down from ~$35k to just under ~$21k and am on target to pay it off next year, for good.

I’ve done all of this while continuing to invest in my retirement and while enjoying my life. The best part of all of this is- I know this is just the beginning for me. You can read more about where I’m starting from here: Why I’m Starting a Blog. 

Conclusion

The paycheck to paycheck cycle doesn’t break with more willpower. It breaks with a better system.

Budgeting requires willpower, while systems run automatically. It might take you some time to set up this system but I promise, it will simplify your life.

If you take just one action from this post, I would encourage you to set up a HYSA and start diverting money towards your financial goals. Check out Ally bank as a good option.

P.s. The other half of this equation is to earn more money- here’s where I’d start: How to Make More Money in Your Day Job.