Credit Union Accounts to Facilitate Budgeting

In order to use your credit union to facilitate your budgeting (and savings), you need to set up the following accounts:

1. Checking Account #1 for expenses.
2. Savings Account connected to your checking account.
3. An overdraft Line of Credit connected to Checking Account #1, so if you overdraw your account, the Line of Credit will automatically deposit money into the Checking Account to cover the overdraft. This will save you a lot of overdraft fees.
4. Checking Account #2 for your monthly entertainment.
5. Arrange for Debit Cards for both checking accounts.

This arrangement is analogous to having different envelopes in your drawer with allocations of your cash for expenses, entertainment and savings, but it accomplishes it electronically. Once these accounts and facilities are set up, take the following actions:

1. Have your paycheck electronically deposited to Checking Account #1.
2. Have a certain savings amount automatically transferred from Checking Account #1 to the associated Savings Account.
3. Have a monthly entertainment amount automatically transferred to Checking Account #2. Use this debit card to pay for your monthly entertainment. When the account is depleted, stop spending and wait for your next paycheck.
4. Use the credit union’s electronic bill pay for all of your bills. Between this and your debit card, you will have a full accounting of your expenses at the end of each month. Most credit unions will allow you to categorize each payee and will aggregate the payments for each budget category.

For example, say your monthly disposable income is $3,500. Your budget includes $2,900 on monthly expenses, $500 for entertainment, and $100 for savings. To manage this, you would do the following:

1. Have your paycheck deposited directly into Checking Account #1. Most likely you will be paid on the last day of the month.
2. Set up an automatic bill pay to transfer $500 into your Checking Account #2 and $100 into your Savings Account each payday.
3. Use your debit card for Checking Account #1 or automatic bill pay to cover monthly expenses.
4. Use your debit card for Checking Account #2 to pay monthly entertainment expenses. When this account is empty, stop spending until you put more money in the entertainment account.
5. Do not touch your savings account unless you are ready to make a purchase you were saving for, for example, to put a down payment on a car or some other long-term goal.

As I mentioned before, do not set up automatic bill pay at a commercial bank. Studies have shown that 95% of customers who set up automatic bill pay do not leave their financial institution. The customer views it as too much work to set up all the accounts again at another financial institution. Move to a credit union before you set up automatic bill pay.