Short-Term Savings Accounts for Irregular Expenses

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This post has been written by Emily from Evolving PF. Enjoy!

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We all have expenses that come due a few times a year – property taxes, membership dues, tuition bills, gift-giving occasions, vision or dental care, and travel, just to name a few!  These expenses are difficult to reconcile with a monthly budget.  Assuming you pay them in full, you can either float these expenses on your checking account balance for that month or save up for them in advance.  I used to float them and while it always seemed to work out, “What if I don’t have enough?” was a constant weight on my mind.  Now that I have been tracking my spending for several years and have identified the periodic expenses in my budget I have switched to saving in advance.  This system is particularly useful for people with already tightly-allocated budgets or aggressive long-term savings goals.

Some people like to keep one big pot of money available (their emergency fund or another account) to which they regularly contribute to draw from when these irregular expenses occur.  Some others may have a mental line in their checking account balance delineating what is available for normal monthly spending from what shouldn’t be touched unless something big comes up.  Personally I think that:

1) An emergency fund should be preserved for a true emergency – an unforeseen vital expense or loss of income.  Annual or bi-annual expenses like the ones I listed above are not unforeseen.  Not drawing a distinction can damage your ability to pay for an ill-timed (and aren’t they always?) emergency.

2) For psychological reasons, I am more motivated to save money into multiple designated accounts than one large general account.  For instance, if I contribute found money to our Travel savings account, I’m pretty sure I’m going to have fun with that money at a later point and that prevents me from blowing it when I find it.

The system is easy to understand.  For each expenditure category, estimate the amount you will need to spend yearly, then divide by twelve and set up an automatic transfer between your checking account and a designated high interest savings account. Some accounts are easier to estimate than others, and whenever possible use the previous spending that you have tracked to inform your future expenditures.

My best example for the utility of this system is our “Entertainment” savings account.  (Remember, only irregular expenses are accounted for with this savings system – if you pay monthly for Netflix, for instance, that would come from your general monthly budget.)  We have two types of expenses:
Large, once-yearly expenses paid in lump sum – easy to calculate.

  • season tickets to our university’s men’s basketball games
  • season tickets to the Broadway musical series at our local theater

Small, irregular but expected expenses – look to past spending to estimate.

  • movies in theaters
  • concerts
  • additional live theater performances

My husband and I definitely need to save in advance for our season tickets because if we tried to float them, each pair would eat up 6-7% of our monthly income.  We also find it useful to save incrementally for the small, irregular expenses.  We only see movies or go to shows a few times per year and it’s nice to be able to just remove the money from this savings account instead of looking to our monthly budget to calculate if we have enough to cover the tickets.  Of course we re-adjust the monthly savings rate periodically to account for inflation and as our lifestyle needs change.

If you think this system would give you more peace of mind and freedom, here’s an easy way to get started – it doesn’t take a lot of available cash!  Right after you make a large, periodic payment by whatever method you’re using now, open a savings account designated for that expense or category of expenses.  (Find the highest-yield free savings account you can easily use, such as those offered by ING or Ally.  Check out bankrate.com to compare current rates.)  Then divide the amount you just paid into the period over which it is used and start a monthly contribution for that amount.  The next time that expense comes up, you’ll have enough in the account to cover it without straining your monthly budget.  Repeat as your other irregular expenses crop up until you have accounted for a full year.

How do you pay for non-monthly expenses?  What do you like or dislike about the proposed system?

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Money

Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

16 Comments

    • When I was just starting out I had a credit card that I thought I would use for emergencies should one come up (thankfully none did). Now I definitely prefer a cash cushion as I am opposed to carrying a credit balance.
      Emily @ evolvingPF recently posted..Tax Time! What Are Your Rates?

    • It does take some effort depending on your method. We use Mint so that’s quite easy, but I double up the tracking with Excel, which I enjoy. I think having the multiple accounts has actually enhanced my tracking – it is so easy to find a past expense/date/purpose because they are already categorized specifically by which account paid for it.
      Emily @ evolvingPF recently posted..Tax Time! What Are Your Rates?

  1. I am with you Emily…I have 17 savings accounts, not hard to follow at all. All at my credit union..I can see what I have to spend in each category on 1 screen shot.

  2. I use one savings account-track multiple amounts I have deposited in the one account. It has worked for me and has actually has increased the actual emergency account. I track a line for Vet Bills and Seasonal Heating. Instead of using savings to pay for those items, I stretched my monthly spending lines. Or I borrowed from the account, and paid it back even though I had originally designated funds for the extra expense. My emergency account is growing much faster!!!

  3. I generally use cash flow to handle any unexpected expenses. If it exceeds my cash flow, I use savings. I do not believe in separate accounts because it is too much accounting. I have an advanatage because I have no debt except for a small mortgage.
    Krantcents recently posted..Friday Night Links: Maze Edition

  4. When we bought our current house 16 years ago we decided not to escrow the taxes. So, to be prepared for the end of the year property taxes we started a savings account just for taxes and insurance. It works great. Once our son was off the payroll with his car insurance, we didn’t change the amount going into the account so it gave us extra money for other things that came up.


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