If you’re looking to save money, it’s worth thinking about the different methods you can use to make your savings go further.
The High 5 Banking method is a popular choice for people who want to have more control over their money.
But what is it? And how does it work? These are questions many of us find ourselves wondering about, but unable to get the answers to.
Well, no more! This article will teach you all about it and includes a step-by-step guide on how to implement it into your lifestyle.
What Is The High 5 Banking Method?
The High 5 Banking method was created by David Bach, who has written several books on personal finance.
He says that his goal is to teach people how to live within their means and build wealth over time from their hard-earned cash.
The High-5 banking method is a simple process that helps you organize the bank accounts that you should use to keep your finances in check.
It teaches you to have different accounts for five different expenditures: these include bills, monthly expenses, lifestyle, emergencies, and long-term goals.
This method helps you to create a budget, track your expenses, and even automate savings. Now that we have established what the method is, let’s take a closer look at it to learn more.
How Does The High 5 Banking Method Work?
You should use five separate bank accounts for five different purposes to do the High 5 Banking Method successfully. Your five distinct bank accounts should be:
Bills account – Compulsory expenditures – housing costs, debts, utilities, groceries.
Monthly expenses – Your monthly expenses should be around 30-50% of your total income. You should pay off as much debt as possible.
Paying late fees or interest charges can damage your credit rating. Don’t spend more than you make.
Lifestyle account – The things you want – personal care, entertainment, home essentials, outings.
Transferring a specific amount into this account when you get paid will help you enjoy your money, but stop spending it once you run out of money in this account.
Emergency account – Emergency expenses only – A financial safety net is a reserve fund used to cover unforeseen expenses.
Experts recommend keeping 3-6 months’ worth of living costs in case of emergencies or job losses. Medical emergencies include surgery, illness, etc. Job losses mean getting fired, laid off, or suspended.
Home repairs include leaking roofs, plumbing problems, and severe weather. Car issues include new batteries, accidents, etc.
Long-term goals account – We all have big dreams with big price tags. This account allows us to easily track progress over 12 months and allocate money to any goal that takes longer than 12 months to achieve.
Examples: Down payments on new cars, houses. Big trips abroad. Weddings: rings, ceremonies, receptions, honeymoons. New babies: childbirth expenses, fertility treatments, adoptions.
Short-term goals account – Short-term goals include upgrades, special gifts, small activities, annual expenses, and starting where you are.
Don’t keep all your money in one place. Keep your accounts spread out across different institutions. Use free budgeting apps to manage your finances. Open accounts that make sense for you.
Now that we have covered how it works, let’s move on and look at the steps you can follow to use the method yourself!
How To Do The High 5 Banking Method?
Below is a step-by-step guide you can follow to budget your money. Keep reading to see how it works.
Step 1: Define Your Spending Target
Before starting any new change in your life, it’s important to define what goals you want to accomplish.
For example, if you want to increase your savings rate, then you need to know exactly where you want to be at the end of the year or quarter.
You can then set realistic financial targets based on your current levels of knowledge and experience.
Begin by calculating what percentage of income you spend each month. The average person spends about 30% of their income on bills each month. So let’s say that you earn $2,000 per month from your job.
That would mean that you have approximately a $600 monthly income left over for discretionary spending. To reach your financial goals, you will need to cut down on your spending.
By setting up a high-level target, you establish specific goals and begin working towards them.
If you have a high credit card balance, then start saving an extra $5 every day until you pay off 50% of your debt.
This may seem like a small amount at first, but as soon as you complete one task, you’ll feel motivated to do another.
At the same time, you should also work to decrease your total outstanding balances. In other words, you should try to pay off less than the minimum payment due on all cards.
Step 2: Create A Budget
You should always make sure that you stay aware of your spending habits. To help achieve this goal, you can use a budgeting calculator such as Mint to calculate your monthly budget.
Step 3: Track Your Expenses With Cash And Receipts
You can find many smartphone apps that allow you to record your receipts so that you don’t forget to itemize purchases later.
Once you start tracking your expenses with cash and receipts, you realize which items cost more.
When you compare these numbers against your spending plan, you can reorient yourself to the real value of different products.
For example, you could buy a pair of shoes that costs $50 and they last just 10 months. However, you may think that the quality of those shoes is great because they look nice.
But after paying for cleaning, repairs, and replacement, you end up spending $70. On the contrary, if you had bought an identical pair of shoes for only $40, then you would not be wasting any cash!
Tip: Keep your cash receipts organized in a bank box. Make sure that you keep your cash in banks instead of hiding it under the bed. This way, you will not forget to record your expenditures later.
Step 4: Save Money Automatically
To maximize your savings, you must learn how to automate your online banking transactions.
When you sign up for automatic payments, you’re able to withdraw funds directly from your account without having to wait for scheduled times.
When you transfer money from one account to another using this tool, take note of the transaction ID number.
If you ever receive a message stating “there was a problem processing your withdrawal,” contact your bank immediately.
In addition, you can create separate accounts for your checking, savings, retirement, mortgage, student loans, and car loan so that each type of expense gets its own designated space.
This helps prevent you from getting distracted when transferring money between different accounts.
Keep in mind that some online services charge fees to send out automated transfers.
Step 5: Pay Off Debt Quickly
Another essential step is to focus on paying off debts quickly. You should always opt for higher interest rates rather than longer repayment terms.
Ideally, you should aim to pay off your highest interest rate debt first. As long as you are making progress towards your goal, don’t let anything stop you from reaching your financial goals.
When you pay off your debt, you should immediately apply for a secured credit card or open a line of credit. Avoid settling for a low-interest personal loan because you can get better deals elsewhere.
Also, save up for bigger purchases by putting more cash aside.
Step 6: Use Rewards Programs
Another important habit is to enroll in rewards programs whenever possible. These types of offers give you free stuff based on your spending habits.
By signing up for different benefits and rewards, you build brand loyalty and boost your sales.
Plus, you earn points and miles that you can convert into discounts. Some companies offer rewards for shopping at their stores too. For instance, Whole Foods gives five percent back on every purchase.
Furthermore, Amazon allows shoppers to use their mobile app to scan barcodes at select retailers and automatically rack up reward points.
If you have a favorite store, try using their gift cards. Not everyone has an Amazon card, but most other stores do.
You may also want to see what coupons there are for your favorite brand. You can combine coupons with your rewards program to save even more money.
Final Thoughts
The high 5 banking system isn’t foolproof. If you’re careless with your money, you can lose a lot. But if you follow these rules while saving money, you’ll get ahead fast.
Think about what you’re spending each month and what you can cut down on.
Your future self will thank you when you can achieve both your long-term and short-term goals while still managing to meet all of your essential costs.
Make your hard-earned money go further with the high 5 banking method!
Financial Disclaimer
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