The Easy Way to Budget for Irregular Expenses Using A Separate Checking Account
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One thing that has plagued me over the years is paying for irregular expenses. Whether it be car maintenance items, kid’s summer camp fees, semi-annual or irregular insurance payments, or a multitude of other irregularly scheduled expenses, I have always had trouble remembering to think ahead for these types of expenses and put money aside for them. These expenses should be budgeted for, but when they occur infrequently, it is hard to keep the money separated in your checking account as untouchable. Another problem is that frequently, I have dipped into my emergency fund to pay for these expenses when I should have budgeted for them. They were not emergencies. As an example, having to replace two tires because you hit a curb and blew them out would be considered an emergency fund item; replacing your tires because they were worn and needed replacing is not an emergency, in my book. Here is an easy way to start capturing these items within your budget by setting up a separate checking account.
Brainstorm and make a list all irregular expenses you can think of.
Over a period of several days, think about all of the irregular expenses in your life. Whether it is oil changes every 3 or 4 months, semi-annual car insurance payments, school registration fees, summer camp for your kids, annual donations you make to a charity, etc. By taking a few days to think of them all, you can capture most all of them. Alternatively, you can look through your bank transactions from last year to get an idea of your irregular payments.
Total them up and divide by the number of paychecks you receive.
Take all of your irregular expenses, total them up, and divide by the number of paychecks you receive every year. For simplicity’s sake, lets assume you are paid twice a month, and the total of your irregular expenses is $2400.
$2400/24 = $100 .
Transfer that amount to a separate checking account.
Open up a separate checking account, and transfer that amount per paycheck into the separate checking account. For me, I have chosen a Capital One Direct Banking High Yield Money Market Account (not an affiliate link). I actually set this account up before I set up my irregular expenses budget, but it works great. They offer a 3.0% APY, no minimum balance, free ATM card and free checks, and you can transfer in and out from a primary checking account as well. There are different transactional limits on this account compared to a normal checking account, you are limited to 6 withdrawals per month, but only 3 can be by check. So, depending on the frequency of your irregular expenses, it may not be for you and you may want a more traditional account. This works out fine for me as I don’t need to write more than 3 checks a month for my irregular expenses, and I can write checks for the bills directly from this account.
Use this account to pay irregular expenses.
Now that you have it set up, when your irregular expense comes along, pay for it out of this account.
Once you set up this account, it can start helping you pay for irregular expenses even if you don’t have the entire amount in the account. Suppose it is July, you have $1200 in your account, and you have to replace your tires. (Again this should be budgeted, not an emergency!) You spend $600, so you are only left with $600, and the next month (August) you have to pay $1000 dollars for school. Even though you are down $400, you are much better off than if you hadn’t budgeted for these expenses at all, as you still have $600 to put towards the payment, instead of trying to scrape up the entire $1000.
Setting up your bills for automatic payment can be great, you don’t have to worry about paying late, late fees, and you can even save yourself postage in some cases. But many people trying to organize and simplify their finances often have a big concern. You do give up some control, so to speak, of your money when you give someone permission to go ahead and take it out at a predetermined time. Many people still aren’t very comfortable with giving up that control, and may also be concerned with providing their financial information over the internet, even if many of the companies seem quite trustworthy, such as utilities, city services, etc. If I set up all my bills for automatic payment, and I am still trying to get my finances under control, will I cause myself more problems by over-drafting my account, or running low on money before I get paid again? Also, many of your bills could be due close to the same time of the month, and you may be worried about paying them all at the same time of the month and how that will effect your available bank balance.
