Saving up for expenses outside the regular monthly budget: My DIY escrow method

escrow

Do you ever get caught out by expenses that aren’t monthly, but should be able to be predicted or expected? On the League of Ordinary Savers Facebook page, I linked to an excellent post from SavingAdvice.com that enumerates these types of expenses. The list includes:

  • Birthday/anniversary/graduation gifts.
  • Christmas and holiday gifts and decorations.
  • Oil changes, new tires, and other routine car maintenance.
  • Charitable contributions.
  • Small trips, such as visits to family that you don’t consider “vacations,” but which cost money nonetheless.

It’s a part of budgeting that sneaks up on a lot of people. Say you’ve followed my advice (or that of a finance guru) and created a monthly budget that you stick to, as well as an emergency fund of at least $1,000. But then your annual homeowner’s insurance bill comes along, and you’re flummoxed. Using your grocery money to pay it will wipe you out. It doesn’t seem fair to use your discretionary spending money since that’s to be used for luxuries and fun things. If you dip into your emergency fund, you’ll have to start building it back up again.

So what do you do? Well, this time, you will have to dip into some line item, or earn some extra money to pay for it. But you can start to prepare for next year’s homeowner’s insurance bill now, so you won’t be caught out again next year. And you can use this experience to think about other expenses that tend to throw you off, and begin to prepare for them as well.

There are many ways you can do this. Mine isn’t necessarily the best or even the easiest, but it works for me. Even if you don’t like my technique, hopefully it will give you a starting-point for figuring out your own system.

You may have read my post about my main budgeting technique, or the follow-up post with links to the spreadsheets I use. Since I like my “Ledger” and “Bills & Budget” spreadsheets and update them frequently, I use them to create “escrow” accounts for expenses that don’t quite fit into my monthly budget.

When I created my monthly budget, I also added in other expenses that weren’t monthly but that I knew were (or probably were) coming. Since 75% of my expenses are monthly, I decided to treat every other expense like it was monthly too. So I totaled up the annual cost (or estimated annual cost) of each expense and divided it by 12, and put that number into my Bills & Budget spreadsheet as a recurring monthly expense.

Examples:

  • Our homeowners’ insurance ($225) gets charged once a year, so I divided by 12 ($18.75) and added it to the monthly budget.
  • Our diaper service charges us every four weeks, so 13 times a year. I multiplied the charge by 13 and then divided by 12, and added that number ($82.33).
  • We have prepaid cellphones, so we fill them up irregularly. But over time, it averages out to about $50 per month, so I made that a line item in my budget.
  • We get haircuts every five weeks, or 10 times per year, so I multiplied the barber’s charge ($80) by 10 and then divided by 12 ($67).
  • One of our student loans gets interest charged quarterly, so I multiplied the interest charge by 4 and divided by 12.
  • I know how much I want us to spend at Christmas and for each person’s birthday, so I totaled up the annual amount and divided by 12.

So, easy enough. But then what happens next month, when you’re balancing your ledger and deleting charges that have come through, and you get to the $18.75 for homeowners’ insurance? That bill isn’t going to come for another 11 months, so what do you do in the meantime?

I decided to leave that charge at the top of my spreadsheet, so it was subtracted from the available balance as if it were an upcoming charge. The next month, when the $18.75 came up again, I deleted that line and added that amount to the line at the top of the spreadsheet. I did that every month. Then, when the year was up and the bill came, I had $225 saved in my checking account, and I’d kept myself from spending it by just pretending it was already taken out of my balance.

I do that with all my non-monthly expenses. For the diapers, I pay my $76 but, since the line item in my budget is $82.33, I find myself with $6.33 left over. So I created a line at the top of my spreadsheet and add that surplus $6.33 there every month. By the time I have to pay diaper charges twice in one month (as occasionally happens with 4-week bills), I’ve saved up enough to cover that extra payment.

Here’s what the top of my “Ledger” spreadsheet looks like:

Escrow

If that sounds too labor-intensive or too mathy, take heart: There are lots of other ways to save up money for non-monthly expenses. For instance, you could add up the cost of these expenses once you’ve figured out how much each one costs per month, and withdraw that amount in cash. Then you could put it in one envelope at home, or divide the appropriate amounts into an envelope for each expense.

Or, you could add up the total monthly amount for all these expenses and create a regular transfer into a linked savings account, from which you could draw the money for each expense as it occurs. (Just be aware that many savings accounts charge fees if you withdraw more than four times per month, so if you have many expenses included you might not want to use this method.)

There are also budgeting apps and software programs that will “set aside” the money for you, so it’s in your checking account but not available according to your budget program.

I’m sure there are tons of other ways to accomplish the same thing, and I’d love to hear if you have any particular technique that works for you. The important thing is not to ignore an expense just because it doesn’t happen monthly. If you pay for it a little at a time, out of each paycheck, it’ll be much less painful and it won’t disrupt your regular budget.

Image courtesy of Vichaya Kiatying-Angsulee / FreeDigitalPhotos.net

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