It’s been my experience that very few expenses are truly unexpected. Therefore it makes sense to plan ahead so that you don’t find yourself scrambling to pay bills. I like the technique a lot of people call a “freedom account” or “freedom funds”.
Financial Planning
If you look at your spending for the past year, I’m sure you can identify many unexpected expenses, expenditures that don’t necessarily occur on a monthly basis. These are things like auto registration, auto insurance, HOA fees, termite/pest control, annual dues/memberships, etc.
The first step to getting a handle on ‘unexpected’ expenses is to determine the general amount. Add up all the irregular expenses you incur then add ~10% just in case. If you don’t already have a savings account you can use for your “freedom fund”, consider opening an online savings account. I prefer ING because it allows you to set up sub-accounts.
Next take the yearly total you established in the first step and divide by your number of pay periods (i.e. 52 if weekly, 26 if biweekly, 12 if monthly). Each pay period, transfer that amount into your freedom fund. Then when one of those expenses arises, you can simply transfer the money to your checking account and not have to worry about how to pay that bill.
Some of you may be thinking that you can’t ‘afford’ to make those regular transfers to your freedom fund. I say, those are expenses that you will incur, like it or not. Therefore, if you can’t afford it, you’re living above your means (spending more than you make). If that’s the case, you should take a good look at your budget and see where cuts can be made. Can you lower the costs of your cellphone bill or cable bill? Can you bring your lunch to work a few times of week instead of going out to lunch? For most people, there will be numerous ways to cut spending. By taking these steps, you’re that much closer to achieving financial freedom. Doesn’t it feel good?
More Articles about Financial Planning:
Save Money or Pay off Debt – 3 Factors to Consider
Teaching Kids to Budget/Giving them the Money Skills
Money Management Strategy for Kids
Saving Money on Moving into a New House
