Managing personal finances is enough to have most people tearing their hair out: miscellaneous outgoings, regular payments, larger purchases that need long-term planning - how does anyone keep on top of it all? One way of getting a better grip on your finances is the 5-account model. Here, we explain what it is and what benefits it can bring.
Definition: What is the 5-account model?
As the name says, the 5-account model means that instead of just one bank account, you have five. Why so many? The answer: To keep things simple. At first glance, that may seem counterintuitive but in practice it makes a lot of sense. Particularly for people in employment who have regular outgoings, are saving up for bigger purchases and must cover other expenses such as insurance premiums, pension and taxes. With the 5-account model each account is set up and used for a specific purpose. The effort it takes at the start to set it up is probably the biggest challenge; the ongoing management of the accounts is relatively straightforward thanks to regular debits.
Account structure of the 5-account model
So that your 5-account model really works, it needs to be set up in a sensible way right from the beginning. That means: Every account is set up with its own subject or specific purpose.
1. The account for your salary and everyday transactions
Ideally, your salary is paid into your account as a regular fixed monthly sum. But the 5-account model also works for self-employed people. This account is the vital hub in the 5-account system because you will be using it virtually every day. Your salary is paid into it and regular outgoings such as rent, food costs or insurance premiums are paid from it. In most cases, you won’t need to set up a new account for this - most people have an account which serves this purpose.
2. The account for wishes
Regularly put aside a fixed percentage of your income so that you gradually build up a small reserve. This is not intended for emergencies but - as its name implies - for special wishes or purchases. For example, when you go on holiday, you will be able to draw on the savings in this account.
3. The account for emergencies
Sensible and indispensable: money put aside for emergencies. The third account is where you keep a financial safety net to tide you over hard times. Transfer a fixed monthly amount from your salary onto this account. Make sure that you have ready access to this account whenever and wherever you need emergency funds (e.g. to repair the car or washing machine).
4. The account for pension saving and shares
Shares? Yes! At least if they are part of your pension planning. There are now various ways to save for retirement, for example with an EFT fund savings plan. All of the payments you make into pension and savings vehicles should come from this account. Make sure you keep it appropriately topped up.
5. The account for a rainy day
You have been made redundant? That’s when your rainy-day account comes into its own. It contains a set amount set aside for when you need it most. No other transactions are made. Only when all other funds are exhausted, and you need to live off your savings are you allowed to touch this account. Otherwise, you can forget that this account exists.
The advantages of the five-account model
Of course, there are a lot of accounts to keep an eye on. If you previously only had one account, five will quickly leave your head spinning. However, if you divide your finances in this way and ensure a regular income, it is possible to build up savings and pay into a pension almost without trying. You don’t need to invest effort into balancing ingoings and outgoings that are all mixed up in the same account. Instead, it is clear which transactions relate to which account. By comparing offers from various banks you can choose the type of account and provider that best suits your needs.
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