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