Updated on 09.16.14

The Two-Account System for Automatic Savings

Trent Hamm

Millie writes in, describing her interesting system of making herself save:

I have my paycheck direct deposited into ING Direct. It comes in like clockwork on the first and third Friday of each month. Then, on the 10th and the 24th of each month, ING automatically transfers about 60% of that paycheck amount directly into my main checking account. I then proceed to live on what’s in my checking account.

Once every few months, I’ll go to ING Direct and do various things with the money. I usually transfer most of it into an investment account – the rest goes to replenish my emergency fund or help with some other short term savings goal.

This really works for me. I hope you share it with your readers.

I think this is a brilliant method for making automatic savings work. It strongly enforces the idea of “paying yourself first” – meaning that personal savings is the highest priority with your money. It forces you to learn how to budget with what you have – if you naturally live paycheck to paycheck, this really enforces some discipline on your financial life. You can throttle it back and forth however you wish – the less you automatically transfer from the savings, the more you will be able to save up for emergencies, debt repayment, and other savings goals.

If a person sticks with this plan over the long haul – no cheating and no dips into the emergency fund for non-emergencies – they can get ahead financially. The smaller the percentage of their paycheck that they transfer, the better off they’ll be.

Understanding the Two-Account System

How it Works: An Example

Let’s say John brings home about $400 a week. He realizes that with some discipline, he can live just fine on about $300 a week – so he decides to try it out. He signs up for an online savings account, has his paycheck automatically deposited into that account, then sets up a weekly automatic transfer that triggers a few days later to transfer $300 into his main checking account.

John scrimps a little bit – taking on a few cash odd jobs, living lean – but he makes living on that $300 a week work. Halfway through the year, he gets a raise at work – now his paycheck is $425 a week, but he doesn’t change a thing about his savings plan.

At the end of the year, John has about $5,900 in savings. That’s enough to write a check for a fairly reliable car. That’s enough – with another two or three years of this – to have the down payment on a decent home. That’s enough to pay for some night classes or, in a few years, pay for a couple years of schooling leading to a bachelor’s degree.

For a person bringing home $400 a week, $5,900 can be “change your life” money. And all it takes is a year.

Switching to a Two-Account System

This system isn’t too hard to set up, either. In fact, I use my own (overly complicated) version of this system to manage my own money.

1. Start living leaner right now

You’re going to need to build up at least a little bit of buffer in your checking account, because there will be a period where you almost “skip” a paycheck. You’re not really skipping a paycheck, but this system means you’ll start receiving your paychecks about a week or so later than you used to. Thus, you will need some extra cash. Plus, you’ll need to live a bit leaner in order to survive on the smaller “paycheck” that you’ll get.

I usually recommend that people start by trimming some of the obvious fat, particularly through one-time actions. Look through all of your bills and see if there’s anything you can cut – premium cable, excessive cell phone plans, and so on. Work on improving the energy efficiency of your home.

2. Look at your regular expenditures

3. Sign up for an online savings account

I use ING Direct and I’m very happy with them, but there are a lot of options out there. An online savings account has the advantage that you can easily manage it at your own computer and also that it earns a solid interest rate.

The real advantage, though, is that it creates a wall between your savings and your spending. With an account at a bank completely separate from your primary bank, you can’t just stroll in and make a big withdrawal on a whim. Instead, you have to log onto your account, execute a transfer, then wait a few days for that transfer to clear both banks. That waiting period gives you time to really think through your decision and it will often convince people that they shouldn’t go through with an unnecessary expenditure.

4. Change your direct deposit at your employer to your new bank

It’s during this period that you’ll have to live lean and pay careful attention to the process, because the direct deposit may not necessarily arrive at your new bank at the exact same schedule as your old bank. Watch your new account carefully to see when the deposit comes in.

Once your first paycheck is in the new account, set up your automatic transfer from the new account to your old checking account. You have a lot of options as to how to set this up.

For one, you can match your current payment schedule – only a few days later – and simply transfer a bit less than you bring in. So, if you have a paycheck that comes in every week for $400 on Fridays, you can have a transfer the following Tuesday or Wednesday for $350 to your checking account. This will leave behind $50 each week in your account, which will really build up.

5. Slowly spread out your paychecks

For example, if you’re paid every two weeks (26 times a year), you can have the transfer happen on the 1st and 15th of each month for the amount of your paycheck – $400 – which would be 24 times a year. This would leave behind the two “extra” checks you get each year – a total of $800.

Or you can do both. If you have a weekly paycheck that’s $400 (52 checks a year), set up four transfers a month at $350 (48 transfers a year). This leaves behind $50 each time you make a transfer – a total of $2,400 over a year – plus the extra four checks – $1,600 a year – for a total savings of $4,000 over the year.

The key is to make sure that you’re transferring less than you bring in. How exactly you do that is up to you, but the purpose of this is to make sure you’re leaving behind some savings in the account. If $10 comes in, less than $10 should be going out.

Once the first transfer comes through from your new account to your old account, you’re good to go. The system is in place – you can largely forget about it. I recommend not changing anything if you get a raise – let that raise go entirely into savings. Instead, only make a change if you’re sure it needs to happen in your life. If you find yourself actually spending substantially less than you’re getting into your checking, lower that transfer a bit. If you’re struggling to make ends meet and you’re not wasting money, don’t be afraid to bump it up a little.

Good luck! This is a great plan that can really help kick your savings into gear.

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  1. Gena says:

    I do the first part even simpler:
    I get paid twice per month. Each payperiod, 50% of my monthly expenses gets direct-deposited into my checking account, with the remainder going to my ING account. I then live off the amount in my checking account.
    Every few months, we re-evaluate our monthly expenses [usually by lowering them!] and I adjust my direct deposit amounts accordingly.

  2. K. B. says:

    I did something similar, but easier, in my opinion – I set up a transfer from my regular bank to ING on the day my paycheque was deposited.

    Similar theory, but you don’t have to change your payroll information (and when I started that job, almost 11 years ago, payroll wouldn’t accept anything but a “bricks & mortar” bank).

    The other thing I like about ING – you can set up separate “accounts”, and transfer into those from your main account. I used those for my yearly car insurance, Christmas savings, etc. – anything that was either a once-a-year payment, or short-term savings (vacation for example).

  3. Kevin says:

    I follow the same approach as K.B.; each month a transfer is made between my “regular” bank (where my check is direct deposited) and my ING account. I never give it any thought, and because the ING account is my emergency fund, I have NO compulsion to use those funds.

    The advantage to the approach described here is that when you do get a raise, if you leave your transfer amount the same each month, you’ll be saving more in the ING (or other) account.

    Six of one…..

  4. Leslie says:

    Trent, it bugs me sometimes when you assume that it’s easy to just pick up an odd cash job. I haven’t found it to be easy at all and is far from reliable.

  5. Gwen says:

    I like this idea. I will be implementing it.

  6. chzplz says:

    I am currently doing it KB’s way, but I just realized a serious upside to switch it around. I get a quarterly bonus (a couple of hundred bucks – not a ton of money) that ends up being treated like a bonus. I have rarely done anything concrete with it because it’s just a couple of hundred bucks every 3 months – it just gets spent. If I went with this way I’d never see it and would be saving an extra $1000/yr.

    The other thing I do is at the end of each month (just before my paycheque comes in) I make sure my credit card balances are at zero, and then I transfer any $$ left in my chequing account into my savings account. Sometimes its only a couple of bucks, sometimes it’s a bit more, but it’s rarely zero.

  7. chzplz says:

    PS… just like this example, I used my savings account $$ to buy a low mileage used car this year – paid cash for the full amount. No car payments!!

  8. adrian says:

    Another “let’s give ING bank some free marketing” post & thread :-)

  9. Chessiq says:

    Pretty cool idea. I had assumed that HSBC charged for online funds transfers between banks, but they don’t… so no need for me to open an ING account. I am changing my payroll info on Monday – all money to HSBC savings… and then transfer to checking as needed to pay off credit card and rent.

  10. lilah says:

    I just set up something similar after reading about the “bucket budget” in Money mag. I opened an ING account and have only my spending money transferred there monthly, even though I get paid twice a month. This way it forces me to stick to the budget. My DD account is used for recurring bills and savings for those once in awhile items. This way I did not have to change my DD info.

  11. Jules says:

    I do this once a month, manually–I get paid once a month. Every Saturday after I get paid, I transfer money to all the places that need it, subtract my train fare from what’s left, and limit myself to spending 90-120 euros a week on groceries and “things” (shampoo, printer paper, birthday presents, books, new bus passes). It works because it’s a pain to transfer money from my savings account to my checking account again during the month, so I’ve got an incentive to stick to my budget.

  12. Terese says:

    I do the automatic transfers into my various savings accounts (Roth IRA, Emergency, and Down Payment) with eTrade, but an alternative for people could be using payroll to directly deposit into two different accounts. Most payrolls allow you to mark how much goes into up to three separate accounts. This would be helpful in the sense that you could set it up and literally forget about it.

  13. Steve says:

    90% of the direct deposit forms i’ve seen have allowed multiple accounts. That seems a lot simpler (unless you get paid weekly or biweekly)

    Sometimes you might get in trouble – I accidentally set up my accounts at my most recent job with the numbers switched, so I was saving my living expense money and spending my savings money. Oops. :)

  14. Danielle says:

    @adrian did you notice he just posted ING.com and NOT a referral link? and yeah, I have been a HAPPY ING customer since 2002 running multiple accounts and CD’s and I tell everyone I know as much as I can. I also have stuff auto debited and always pay myself first!

  15. Courtney says:

    We do this too, except DH’s paycheck gets direct-deposited into checking (2x a month) for bills and fun money, and my paycheck gets direct-deposited (1x a month) into ING and then sorted into various sub-accounts a few days later.

  16. rich says:

    just be careful – you’re only allowed 6 (or 4, can’t remember) transfers a month for ING. so watch how many accounts you are funding with ING

  17. JoshuaRule says:

    I started my first automatic savings account thanks to the simple dollar and ing direct earlier this year. I live super lean already so that I can work as little as possible to work on music…my passion, but taking out $15 bucks each two weeks is something that is small enough that it doesn’t affect me too much week to week but big enough that I already have over a hundred bucks saved. Which actually really excites me because I have NEVER had a savings account. When I finally get a raise or make money doing freelance gigs I already have a place to put it that makes me feel warm inside. Thanks for the advice.

  18. Q says:

    My company lets me set my direct deposit to send portions of the check wherever – by %, $ amount, whatever you like…I would think this option would be available to most other people as well…so, cuts down on tracking or waiting – just everything is split by your work. Slice of pie.

  19. Cheryl says:

    This seems like a complicated way to do things. I just use direct deposit to have a set amount sent to our credit union savings every week, and the rest gets put in our checking where we can access it right away. I just joined a bank that pays 10 cents every time I pay a bill online or use my debit card, so I can make up to $10 a month. I use the credit union account savings to save for property taxes, and my emergency fund. We just paid off our mortgage in April, and now we apply that payment to our credit card. Once that is done in Sept., we will knock off our car loan next. By Dec. 2009 I hope to be debt free (God willing!) and sending all those payments to our savings instead!

  20. Lenore says:

    Hey, Trent, I liked this one. I wonder if you could address a question for all of us in the Disability or Retirement boats sometime.

    I have been unable to work since 2003, and it’s unlikely I’ll ever resume my career unless much better medication is developed. To keep receiving Social Security, my only source of income, I am not allowed to have more than $2000 deposited in any bank or combination of banks at any one time. That’s fair enough because I probably don’t need government assistance if I’m rolling in cash. It does act as a detriment to saving and make me nervous about unexpected expenses though.

    So far my solution has been to sock away about $20 in cash a week out of my spending money so I can keep a couple hundred dollars in a fireproof safe at home. It’s not much to allay my fears, but it could help pay for car repairs, essential home maintenance or a medical emergency not fully covered by Medicare.

    What do you think, Trent? Am I doing all I can to build an emergency fund under these conditions? I don’t want to cheat Uncle Sam or have too much cash lying around for a burglar or tornado to take, but it’s scary to live paycheck-to-paycheck in an unpredictable world.

    Is it possible to open some special kind of account, perhaps in conjunction with a relative, in a situation like this? Is there any legal way I can earn a little interest on whatever savings I’m able to put together?

    My monthly Social Security check is about $1200, and I usually end up with $300-$500 left in my checking account after paying all my bills and allowing myself $400 a month for cash. If I kept much savings in the checking account, I might go over the $2000 limit at some point during the month and lose my only income.

    Getting on Social Security was too hard to jeapordize it for a little financial ease of mind. If I had to reapply, it might take months or years, and I’d probably need an attorney again. Risking losing it for even a brief period is simply not an option.

    To anyone earning less than this working full-time, I want to apologize if I seem greedy, ungrateful or over-indulged. The Social Security payment one gets is based on lifetime earnings prior to retirement or disability. I was a degreed professional making $30,000 a year at my highest salary, so my income is pretty good. I understand that many people would be delighted to accrue over $1000 a month while not working. Please bear in mind that the physical and emotional costs of becoming disabled tend to blot out any fiscal gains.

  21. deRuiter says:

    Dear Leslie, You have to look for cash jobs, and you have to let people KNOW you want extra work. Dog walking, pet sitting (people frequently ask me to do this), window washing, baby sitting, occasional cleaning jobs before big holidays such as taking down the “good” china and washing each piece in a rubber dish pan one at a time so nothing is broken and the dishes are sparkling clean for the festive meal or washing the baseboards and walls, working for a catering business which is usually around holidays, running errands, car washing, RUN A YARD SALE TO SELL ALL YOUR SURPLUS STUFF and invite your friends to share the day and the costs, house sitting, plant watering, companion to a shut in, running errands, picking produce during harvest seasons, stable cleaning and horse feeding while owners of back yard horses go on vacation, standing in line for tickets, pizza delivery, picking up dog poop twice a week, house sitting, the list of things which other people will pay to have someone do is endless. The pay isn’t enormous, but it adds up. Once you do something for one person, and do it well, others will learn and ask. There is a woman in our town who weeds flower beds for people with fancy beds which landscapers won’t do, she also plants flowers in planters for busy people. In an upscale area she gets $30./ hour for this specialty skill. Frankly it’s a question of picking through the opportunities and taking which jobs interest you. If you live in a totally poverty stricken area, MOVE to where things are better. When asked why he robbed banks, Willie Sutton said, “Because that’s where the money is.” Look where the money is and earn the extra cash you want.

  22. Kristi says:

    Hi! I really like this idea. We are paid biweekly which means twice a year there is an extra paycheck but our budget is only for 2 paychecks. We always find it so complicated to get that third paycheck out and into savings without screwing things up. So I like this idea because the thrid paycheck will just stay in the saving. Thanks for all all the work you put into this blog. I enjoy reading it!

  23. Joe L says:

    Trent I like this post. I do the same with my paycheck. Right now I am getting around 60% of my paycheck and the rest is for investment. I think it’s brilliant.

  24. KAD says:

    I too have the inverse of this arrangement, having ING take money from my brick and mortar account after each DD paycheck. I love the simplicity of Millie’s system, and would be tempted to switch, but my bank waives all fees because I DD my paycheck.

  25. Alison says:

    @deRuiter & Trent,
    I too have had difficulty working out a cash job or side hustle and I think it relates to two of Trent’s main principles. 1. side hustles are great and often allow you to make money at a hobby or something you like anyway. 2. your network of neighbors, friends & family is critical in helping you in case of emergencies, for needed expertise and for free entertainment (dinner parties).

    My problem has been, how could I ask these neighbors and friends to pay me money for doing something I am happy to do for free (or as an investment in our friendship)?


  26. Kathy says:

    I do sort of the same thing, but it’s a combination of manually transferring money into one account and having the money from my check automatically deposited into one account. I don’t think it matters what bank or what account you put the money in, but the bottom line is that you should treat “saving” as if it were another obligation, like rent/mortgage or utilities, etc. That’s how I look at it when I figure out my budget and my bills.

    I’m not up to this level yet, but it’s certainly well worth looking into.

  27. jon says:

    how is this any different from posts you’ve already done? plus ing offers a non competitive rate so obv this reader is not making the most of his APR potential.

  28. Amateur says:

    Finding a side job that even yields consistent extras can be near impossible if you factor in your regular job, commute, associated chores, and other obligations. With that said, sporadic bonuses of random side jobs are possible, but you’ll need to look deep within your network of family, friends, and colleagues.

    If you own a larger vehicle, you can possibly do things like help someone within your network’s acquaintances to do a quick move on a weekend for some extra cash. You could also drive someone to the airport, or pick someone up, there’s a bunch of those little things you can possibly do, if you can deal with minor bumps or even frustrating moments. But, you must be reliable, that is another issue, if you’ve got too much on your plate personally, it can easily break trust.

    I’ve seen folks do the whole, “I’ll drive you to IKEA, wait for you in the parking lot, and then drive you and your stuff home.” deals to make extra cash. There are ways of doing things, but the issue is as always, they aren’t consistent and requires a bit of commitment on time and elbow grease to do.

    If you are good around the house, you can offer up serious home maintenance for your networked folks, while they trust that some stranger will not steal from them while working in their house. If you are killer at standardized tests, I’m sure your networked folks with teen kids and a tight budget would consider someone like you.

    Ask around, it doesn’t hurt, but be reliable.

  29. Courtney says:

    @ Rich (#12) – it’s 6 per month, but the way around that is to have my paycheck initially going into an ING checking account (electric orange) before getting disbursed to various places.

  30. Georgia says:

    I started saving at Emigrant-Direct when I read about these sites on this blog. When I retired, I figured I would get no money from my retirement. I assumed it would all go to insurance and taxes. However, first pay period, I got a DD to my checking acct. of $109.00. Since I hadn’t planned on it, $100 of it went directly to the E-D account I opened. A year and a half later, my husband died and my insurance premium was cut in half. So another $200 into savings monthly. Now my utility bill even payment is $90 a month (thanks to a large credit from last year) and the balance ($160) goes directly into my savings. I worked p/t for 1 1/2 years and most of that went into savings. I use it for vacations and an emergency fund to keep on hand in case I need another used car.

    I had learned this lesson from my 503b. I started at 49 with a small amount. Finally, I got smart and put my raise in each year. I was able to manage this even though we were deep in cc debt and working our way out. After 5-6 years, I went in to put my raise in. They said I couldn’t. I was, with $11 from this raise, putting in the maximum – 25% of my gross monthly income. I informed them I couldn’t be saving that much. I didn’t know how. But it was true.

    Now, at 72, I don’t have even 1/10 of what they say you need to retire. But I am comfortable with it. I take it out only once a year. In 3 years I have withdrawn about $14,5k and my balance is only down $4k. How’s that for compound interest. In fact, I don’t have to withdraw the minimum this year and so, if I don’t withdraw until 12/2010, my balance will only be down by $1k. I’m swimming in riches, it seems to me.

    But, I really am rich in my area of the country. My SS is $1,067 after Medicare and I have my retirement of $310 clear after insurance and my husband’s of $555. Technically, I am saving one of the retirements each month. I own my own home and can walk any where in town I need to go. Saves gas. There are really great advantages to living in a low COL area. Try it – you’ll like it.

  31. Hi Trent,

    I use a similar system to Millie – and it has been fabulous ever since I set it up. It’s from T. Harv Eker’s book, Secrets of the Millionaire Mind.

    Nothing overly complicated to understand and setup, but the benefits from using this system have amazed me. Within 12 months of using Harv’s JARS money management system, my wife and I have:

    – increased uur net worth increased by 45%.
    – bought our first home for $337,000.
    – created $800/month in passive income by renting out our one bedroom basement apartment.

    Harv’s system is far from scientific and complex, but aren’t the simple things in life the most helpful?

    Thanks for sharing Millie’s story and doing what you do.

  32. Sheila says:

    Lenore (#15), I’m on SSD, and I don’t remember any regulation about having more than $2,000 deposited in banks. Do you have a source for this regulation? I’m hoping you’re talking SSI and not SSD.

    “Please bear in mind that the physical and emotional costs of becoming disabled tend to blot out any fiscal gains.” Agree 100% with this statement, although I don’t believe many on SSD or SSI have “fiscal gains.”

  33. deRuiter says:

    Dear Alison, How nice you sound! Put an ad in Craigslist offering your servies and a modest price, around here it’s “dog walking, loving pet owner, $13./half hour” or whatever it is you want to do. Post notes on local bulletin boards asking for work. CALL ALL YOUR FRIENDS AND ASK IF THEY KNOW ANYONE WHO WANTS TO HIRE YOU TO DO ODD JOBS. Speak up girl! How do people know to mention your services to their friends IF YOU DON’T TELL THEM YOU ARE LOOKING FOR PART TIME WORK? Surely you don’t scrub baseboards for your friends for free? Tell them you are looking for heavy cleaning work to earn some cash, and ask if they know anyone who needs help.

  34. Solid strategy– I use it myself. Out-of-sight is out-of-mind and alows you to build savings fast.

  35. Christine says:

    There’s really no need to transfer. Most workplaces just let you make multiple direct deposits, either by percentage of paycheck or dollar amount. I feel like it just overcomplicates everything to set up a network of electronic transfers, unless you need the psychological crutch.

    My direct deposit is set up so that $250 of every paycheck I receive goes into a dedicated savings account, my half our our shared rent goes into a joint account I share with my fiance, and the balance goes into my regular checking account.

    It’s an awesome system.

  36. SteveJ says:

    @Alison – I agree with deRuiter, just let people know you’re looking for some work. I’m much more likely to hire/pay someone I know. For instance, I’d never pay a lawn service to do my yard, but I’ll pay my brother $20. If I’m just looking to save my time one weekend, it’s not worth it, but if I can help my brother out and save a few hours, then it changes the equation for me.

  37. cappycobra says:


    I pretty much use that method as well.

    I myself do $1100 a paycheck to cover my rent and expenses. The rest is right to the savings account. Any future raises I allocate to my ESPP or roth. This way I’m budgeting, saving AND investing. =D

    Terese, if your employer uses ADP, you should be able to do MORE than 3 accounts. It says so right on the form :)

  38. Steve says:

    I do this with direct deposit, to several purposed accounts (e.g. Housing Fund for building downpayment, Gifts Fund for weddings/birthdays/holidays), all of which are with an online bank. Whenever I make a purchase that falls into one of those categories, I just use a cash back rewards credit card and transfer the appropriate amount from the purposed account, to cover that portion of the credit card payment. Works like a charm.

  39. Eric says:

    First time commenter, long time lurker. This is a great idea especially for college students like myself who also work. Keep the money tips coming Trent and readers…

  40. Victor AY says:

    Hi Trent,

    In general, it’s a good idea. I have the issue of getting a lower interest in return when savings account are generating meager sum of interest. Do anyone of you have any alternatives to automatic investing ?

  41. no_sked says:

    the 2 accounts work well for me too. our paychecks are auto-deposited into a free credit union then i have auto-bill pay to myself at another bank, which is also free.
    however, the other bank does not have many services online and is out of state, so it’s inconvenient to get my money and spend it needlessly… which is a good thing.
    slowly but surely, the bank savings is growing!

  42. In Brazil, where I live, it would be difficult to do. Transfers between banks are charged in a couple of bucks. Plus, usually the employer has agreements with one or only a few banks and the paychecks are only sent to those banks.

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