How badly do you want to be wealthy? Enough to change your habits from those of the middle class (i.e. “I got a raise” equals “I'm in the market for a larger house/car”) to those of the wealthy? If seven bank accounts sounds overwhelming, or if a maximum of 10% of your income budgeted for non-essentials sounds Draconian, then consider that becoming wealthy requires temporarily putting comfort second and becoming wealthy first.
7 Bank Accounts: Budgeting to Become a Wealthy Real Estate Investor
1. Emergency Savings (5-10% of After-Tax Income)
This fund is literally for life and death issues only, e.g. “the bank is repossessing my house tomorrow.” This account should be kept at a different bank than your others, out of sight, and you should not think of this account as part of your assets. Never draw on it unless a true emergency is looming and you have nowhere else to turn. Automatically transfer 10% of your monthly income to this account on the first of the month until you have six months' living expenses covered, then you can lower it to 5% if you so choose.
Purpose: Safety & Security
2. Investment Funding Account (25+% of After-Tax Income)
This account represents your savings account for buying new real estate investments. Whether you buy with mortgage loans or cash, the post-bubble era requires heavy down payments from real estate investors, so cash on hand is more important than ever. The more money you automatically transfer on the first of the month to this account, the faster you will accumulate income-producing rental properties, which means more income, which means more money transferred to this account, which means more income-producing rental properties… it is an upward spiral of wealth.
Purpose: Becoming Wealthy
3. Rental Unit Operating Account(s) (0% of After-Tax Income)
These accounts actually generate their own revenue. If they do not, examine why not, and take measures to reverse the negative cash flow from rental units to become positive. It is extremely difficult to become wealthy if your investments drain your income rather than add to it – this proves the difference between an asset and a liability. After you have at least three months' expenses covered for each rental property in the operating account(s), start auto-transferring proceeds to the Investment Funding Account.
Purpose: Rental Expenses & Separation of Funds for Different Legal Entities
4. Regular Savings (5-10% of After-Tax Income)
There is always some big-ticket item that requires saving for – a down payment on a home, a car, a new roof, a much-needed vacation – everyone knows the drill for traditional savings accounts. Automatically transfer 10% of your monthly income to this account, and do not withdraw for big-ticket purchases until you have three months' living expenses covered plus the big-ticket item's cost covered in this account. Large unexpected bills (e.g. “the car needs a new transmission”) can come out of this account, but this will of course postpone your next big-ticket purchase.
Purpose: Lifestyle Security & Improvement
5. Household Checking (<40% of After-Tax Income)
Paychecks should be deposited here, and money automatically transferred out to the other accounts on the first of the month. Ideally all recurring monthly bills (home mortgage, utilities, car payments, student loan payments, etc) should be auto-deducted from this account, but this account should retain no more than 40% of after-tax income, and should only be used for central living expenses and debts, and never optional expenses.
Purpose: Necessary Monthly Expenses
6. Health Savings Account (5% of After-Tax Income)
Health Savings Accounts (HSAs) offer benefits ranging from being untaxed to including debit cards exclusively for medical costs for easy accounting, and merit a more detailed discussion than can be covered here. If your health care is covered by your employer, consider splitting this 5% between the Investments account and the Regular Savings account.
Purpose: Safety & Security
7. Personal/Disposable Checking (5-10% of After-Tax Income)
This account covers all the non-essentials: lunches out with work friends, new clothes, haircuts, dry cleaning, happy hour, long weekends skiing, etc. If you have a credit card (which is a good way to ruin this carefully-architected budget), pay it from this account, and only spend on it up to what you can cover from this account's monthly allotment. But the easiest approach is simply to withdraw all the cash on the first of the month, and only use cash throughout the month. If you do not feel comfortable with cash, use a debit card, and just keep an eye on the balance throughout the month.
Purpose: Comfort & Immediate Happiness
It may not be fun or glamorous to put yourself on a stringent budget, but it is what separates the trajectories of two people who earn the same income. One will grow wealthy (the hard way, the only way, despite what the lottery says), while the other stagnates under the debt and trappings of the middle class. Becoming wealthy is not as much fun as spending everything you earn today, but being wealthy is a lot more fun than working longer and paying off debts tomorrow.