I’ve talked about this before on my blog, probably ad nauseum for some of my more faithful readers, but I am a strong believer in what I call my “yearly savings”.
The idea struck me when I was in graduate school trying to live on a VERY tight budget. I realized the times when I was really in trouble financially were months when I had a large expense on top of paycheck to paycheck living. Things like buying contacts. Christmas presents. Vacations. Car maintenance. Car registration. Professional affiliation dues.
All of them were things I knew I would have to pay every year. But having a $100 car registration due on top of a tight salary left me resorting to the credit card towards the end of the month just to pay for everything.
My solution was pretty simple: Add up the amount I want to spend on these things a year. Divide by 12. Put this amount in to a savings account each month. Pull from this account to pay for the expenses. If the amount goes over the amount that I’ve allocated pay for the remainder from my regular checking account – which is much easier to manage!
(In reality, I just pay for the expense with my checking account and then transfer funds after the fact or before, depending on the scenario.)
My categories are as follow:
Car Maintenance Fund – $480/year – $40/month – I currently have $0 remaining to spend
Christmas – $480/year – $40/month – I currently have $417 remaining to spend
Car registration – $120/year – $10/month – I currently have $17 remaining to spend
Pet vaccinations – $240/year – $20/month – I currently have $0 remaining to spend
Haircut/beautification – $180/year – $15/month – I currently have $30 remaining to spend
Health fund – $240/year – $20/month – I currently have $165 remaining to spend
Vacation fund – $480/year – $40/month – I currently have $230 remaining to spend
Professional affiliation dues – $60/year – $5/month – I currently have $0 remaining to spend
For the next year I’ll also need to save up monthly for car insurance payments and renters insurance as well (I’m switching to paying annually/bi-annually rather than monthly to save a few extra bucks). I’ve already started saving this amount so it shouldn’t be an issue to pay when the time comes ($50/month for both).
Now here is the delimna. I plan this on a yearly basis. So I can start at $0 on January 1st and still be solvent for the entire year (assuming the car doesn’t need all its repairs at once or more than one or two things don’t hit at the same time). I know Christmas won’t happen till the end of the year. I know that my professional dues aren’t due until June. My car registration the same month. The pet vaccinations will be in February. It is a little bit of a gamble the first few months, but I do have an E-fund to pull from as back up if I don’t have enough in my yearly account to pay the difference and then I just credit the E-fund with the amount borrowed over the next few pay checks.
I will have money left over come December as I won’t have used all of the car registration, vacation fund, or health fund. This will be around $400. I have three options for this money:
1. Keep it in the yearly savings account as a “buffer” if multiple expenses happen at once at the beginning of the year.
2. Put this money in to the E-fund at the beginning of the year and start from $0 for 2011 in the yearly savings.
3. Put this money on the credit card and start from $0 for 2011 in the yearly savings.
I’m not quite sure which option I want to pick. I like #1 and #2 the best because it keeps the money geared towards its original intention: savings. Part of me wants to just keep the money where it is at just because it is easier that way. But from a straight budgeting/math point of view it is easier to “wipe the slate clean” in January and start from $0. It makes reconciling my account balance with my Excel file so much easier.
What to do… what to do?