Step 1: Determine irregular expenses. Using last year's check registers or paid bills folder, make a list of expenses that you do not pay on a regular monthly basis. These expenses might be paid quarterly, semi-annually, or annually. Multiply to reach an annual figure and then divide by 12 so you can arrive at a figure that represents one-twelfth of the total annual expense.
Here are some fictitious and hypothetical expenses Sam and Samantha Example, our fictitious and hypothetical family of four, calculated to be their irregular expenses. Please don't get hung up on these dollar figures and miss the principles they represent. They are made up and do not indicate what is typical.
Auto maintenance/repairs: $900/yr divided by 12=$75/mo
Auto insurance: $540/yr divided by 12=$45/mo
Life insurance: $480/yr divided by 12=$40/mo
Property taxes: $600/yr divided by 12=$50/mo
Vacation: $900/yr divided by 12=$75/mo
Clothing: $600/yr divided by 12=$50/mo
Sam and Samantha receive their income monthly; therefore, they will handle their Freedom Account on a monthly basis. You may not be paid once a month; however, since it would be impossible for me to convert every illustration to fit your particular payroll schedule, I'll leave it to you to translate the principles herein to fit your particular circumstances.
Step 2: Open two checking accounts. Yes, two. Shop for a bank or credit union that offers the best terms available, such as no fee with a minimum balance, low-fee, or interest-bearing checking accounts with minimum balance. Open the two accounts at the same time and order checks for each account. (I highly recommend duplicate checks even though they cost a bit more.) Have them personalized and add the words Regular Account and Freedom Account under your name and address on the accounts and checks. If you wish to continue using your present checking account for the Regular Account, simply open a second at the same institution. The point is that you need to have two active checking accounts at a bank that will offer you the best terms and services. Do not - I repeat, do not - accept an ATM card for the Freedom Account. Having ATM access to this account will defeat its purpose.
The Regular Account will continue to accommodate your monthly expenses and typical day-to-day needs, such as groceries, gas, etc. You will continue to deposit your regular paychecks and other forms of income into this account.
Step 3: Request an automatic deposit authorization. At the time you open the accounts, request an automatic deposit authorization form (my bank calls this an Automatic Money Transfer Form), instructing the bank to transfer the monthly total of your irregular expenses ($335 is the figure Sam and Samantha will use) from your Regular Account into your Freedom Account on a specific day of the month, preferably no more than five days after the date on which you will be depositing your paycheck.
Example: You are paid once a month on the 15th. You instruct the bank to automatically transfer $335 from your Regular Account into your Freedom Account on the 20th of every month. The five-day "cushion" will cover the unusual months when your regular payday falls on a holiday or weekend. The selection of your transfer date is important, because once it's established you can be sure the bank will never forget to make the transfer, nor will they be late.
Step 4: Get a loose-leaf notebook and label it "Freedom Account." As far as the bank is concerned, you have a single account that you have designated your Freedom Account. (The bank doesn't care how you refer to it; banks only recognize account numbers.) But you are going to treat it as six sub-accounts (or three or eight - whatever your particular case may be according to the number of Irregular Expenses you determined that you have; Sam and Samantha have six.) In your notebook, prepare one page per sub-account .... Keep it simple. Fill in the title, enter the amount to be deposited into that particular sub-account in the upper right-hand corner, and prepare five columns, "Date," "Transaction," "In," "Out," and "Balance," for each sub-account.
Step 5: Get in the habit. Each time you deposit your paycheck into your Regular Account, deduct the amount of your Irregular Expenses' monthly allocation ($335 for Sam and Samantha) on your Regular Account checkbook register. Don't even think about forgetting; the bank never will. It will feel weird in the beginning. You won't like making this debit entry because there are so many things you could do with the money. But you are controlling your money instead of it controlling you.
Next, go to your Freedom Account notebook and enter the individual deposits. Here is how Sam and Samantha will make their first $335 automatic transfer deposit into their Freedom Account: They will enter deposits of:
$75 into Auto Maintenance/Repair
$45 into Auto Insurance
$40 into Life Insurance
$50 into Property Taxes
$75 into Vacation
$50 into Clothing
In the first few months of this new behavior you must not give in to the temptation of withdrawing from your Freedom Account for anything other than the purpose of the sub-account. No borrowing. Don't dip into your Life Insurance sub-account to pay your monthly utility bill - even if you promise to pay it back. You may feel coerced, you'll be tempted, you'll be afraid you can't stop yourself, but don't.
At times you will also be tempted to think of this account as a savings account, and you may find yourself skipping your true savings or even hesitating to write appropriate payments out of the Freedom Account. This is not a savings account. This money has been committed already. The account will give new meaning to the phrase ebb and flow. It is strictly a financial management tool.
Next month you will repeat this process. On the day you deposit your paycheck, you will go right to your Regular Account checkbook register and deduct the automatic transfer. You will then go to your Freedom Account, enter the individual deposits, and calculate the new balance for each of your sub-accounts. The total of all your sub-accounts in this second month should be two-twelfths of your annual Irregular Expenses. For Sam and Samantha, it is $670, or $335 times two.
Continue this procedure every month. In the third or fourth month, something wonderful will happen if you are diligent and don't give up. You will begin to experience a new level of comfort and tranquility. You will feel yourself start to relax.
Excerpted by permission from The Complete Cheapskate: How to Get Out of Debt, Stay Out, and Break Free from Money Worries Forever, copyright 1997 by Mary Hunt. Published by Broadman & Holman Publishers, Nashville, Tn., www.lifewaystores.com, 1-800-448-8032.
Mary Hunt is the founder and publisher of Cheapskate Monthly newsletter and a respected authority on spending habits and financial responsibility.
What irregular expenses surprise you when they come due? How do you try to plan for them? Visit Crosswalks forums to discuss this topic by clicking on the link below.