I meet too many smart clients who earn terrific income but their financial life is a mess.  What’s more, their cell phone bills are paid in full each month, the cable bill is paid, the dog groomer was paid and even the pizza delivery guy was paid a tip, but despite all their hard work and income somehow the mortgage did not get paid and a foreclosure sale is pending.  When you ask why they are 10 payments behind on the mortgage even though they earned enough to pay it in full each month they answer that some emergency or unplanned expense came up—medical bills, car repairs, etc.—and then it began to snowball from there. 

When I interview most married clients they describe their financial payment system like this.  I love you. You love me.  Since we love each other so much let’s get married, have kids, and open a joint bank account.  Let’s work hard and deposit all our money into that one account.  Here is your debit card and here is mine. All month long we use the debit cards and then at the end of the month let’s meet up at the kitchen table and pay the bills.  Of course, the problem is that this was a hard month.  Well, the truck broke down and little Tommy needed school pictures and we had that terrible vet bill when the dog decided it could fly.  There just isn’t enough money left to pay the mortgage.   Yes, what we have here is a failure to prioritize.

The fact is, some bills are more important than others.  Paying the mortgage is more important than buying pizza on Friday night.  We all know what these priorities are:  Mortgage, Utilities, Insurance, Car Payment, House Taxes, Cell Phones, etc.  There are just some bills that if you don’t pay them they kick you in the behind. 

Here is the trick that can save your finances and perhaps your marriage as well.  Add up all the priority expenses you must pay each month and then figure out how much they come to each paycheck.  For example, if you pay $1,000 for rent, $300 for utilities, $400 for a car payment, $100 for auto insurance each month, then your monthly priority figure is $1,800.  If you are paid twice a month, then you need to set aside $900 per paycheck to pay the priority bills.

Now read this:  Do not mix your priority money with the rest of your money.  Take the first $900 of earnings on payday and deposit it into a separate bank account.  Most employers will directly deposit your paycheck into several accounts.  Open a new bank account and tell your payroll department to deposit the first $900 of each paycheck into the new account.  You don’t want debit cards for this account.  In fact, it is best if you don’t even request paper checks.  Learn how to use the free on-line BillPay service offered at most banks.  When the next paycheck arrives later in the month you should have all $1,800 required to pay the priority bills.  Set up the BillPay service to automatically pay your priority bills on time each month.  See how simple this is?  Money automatically is deposited each payday and is automatically mailed to creditors each month.  No more late fees.  No more defaults. 

The basic idea here is to build a wall between your money—divide and conquer—by keeping the priority bill money in a separate account from the money you use to pay daily expenses.  Some folks call this “Envelope Budgeting” because they actually put cash into separate envelopes each payday to pay their important bills.  It’s the same concept.  Divide the money. Do not comingle the funds used to pay your most important bills with money used for day to day living. 

The basic idea here is to build a wall between your money—divide and conquer—by keeping the priority bill money in a separate account from the money you use to pay daily expenses

Writing a budget on paper is not budgeting.  Unless the budget takes action it is no more a budget than an architect’s blueprint is a home.  To budget means to divide, and not just on paper but in a physical way.  You need a payday action plan.  Where does the most important money you earn go on payday?  Into a joint account commingled with other less important money or into a separate purpose-driven account?  By utilizing separate bank accounts funded directly on payday with specific spending purposes you can take control of your money and ensure that your financial goals are achieved.

Image courtesy of Flickr and Simon Cunningham