Why is there so much month left at the end of your money? Chances are it’s not the routine, predictable expenses that are the problem. It might not even be the large, impulse purchases. Often times it’s the irregular expenses – those that don’t occur every month – that cause your budget to fail. Expenses like car insurance, car repairs, property taxes, vacations, and holiday spending.
Author and personal finance expert Mary Hunt has the solution. It’s called a “Freedom Account.” Hunt says that a Freedom Account “forces you to anticipate irregular expenses so that you can finance your own emergencies.” Here’s how it works:
1. First, make a list of all of your expenses that occur irregularly. A quick look at your check register and credit card statements for the past year is a good place to start because your list will be unique depending on your circumstances.
2. Total the annual amount of your anticipated irregular expenses. Some of these will be expenses that you have little control over, like insurance. Other expenses – like vacations and holiday spending – will be discretionary and you’ll need to decide what you want your budget for these items to be. Finally, some expenses will be unknown – like car repairs – so you’ll have to make an educated estimate.
3. Take the number that you arrived at in step two and divide by twelve. This will give you a monthly “bill” that you’ll be paying to yourself when you pay your other bills. Set this aside in a separate account so it won’t become commingled with your other funds.
4. Pay your irregular expenses from your Freedom Account when they occur and enjoy the fact that the money is already set aside.
For more information visit Mary Hunt’s web site, Debt Proof Living.