Sometime ago I used to have a problem. I used to go to the ATM and withdraw three or five thousand rupees and put it in my wallet – thinking it would last me a good while. Then a few days later I used to open my wallet again and all the money was gone. Where did I spend all that money? Turns out it was many small purchases here and there for odds and ends – but it all added up much quicker than expected. And then the cycle would start again.

This phenomenon happens to many of us. Now imagine that at the scale of your salary – and happening every month. Which is why budgets are incredibly important. But budgets can be tedious to make and monitor over time. 

Monika Halan, in her book “Let’s Talk Money” found a cool workaround for this: she created a three-bank account system. Essentially you have one bank account which is for your income. As soon as your salary is credited, you immediately transfer out a certain amount to a second bank account that is solely dedicated to your investments and a certain amount to a third bank account which is dedicated for your spending.

The beauty of this system is that it helps you set aside money that is meant for investing which is a good habit for the long term. Plus, it forces you to keep your spending within a certain limit that you have specified. If you want to spend more, you will have to make the conscious decision and effort to transfer more money – which makes you think a little more about whether the purchase you want to make is worth it.

In this way the three bank accounts – for income, investing and spending – form a system that can help you bring some financial discipline to your cash flows. Budgets always form the first step of your personal finances because once you have control over your cash flows, you can then start being more strategic about allocating money towards savings and your financial goals.