Monthly AccrualMonday, January 24th, 2011 by Charles Mayfield, CFP®
Your accountant does it. Your mortgage company does it. Why shouldn’t you take advantage of setting up a monthly accrual system to save for your annual expenses? Even just a little bit truly does add up over time, eventually becoming a sizable amount that can bring some relief when paying for larger expenses. In a perfect world, you already have your 2011 budget locked down and have a good idea of what your major expenses should be. Now is a perfect time to carve some of those larger expenses out of the budget and start saving specifically for them.
Online banking has made it so incredibly easy to carve out money each month and sock it away for later use. Here are my top 5 expenses that you can save for in the coming years.
***See last week’s blog for tips on how to be careful when setting up any new accounts specifically to hold your monthly accrual***
#1. Travel Plans
I’m not talking about a spontaneous weekend excursion (although you can throw those in). We all have that one trip we want to take every year. It can be a family trip to the beach or the annual ski trip to Vail. In either case, you most likely know about how much you will have to, or are willing to, spend. Starting a vacation fund today will help keep you on a budget and provide you with the money you need when it’s time to pack up the luggage.
#2. Auto Insurance/Auto Payments
Unless you pay by bank draft (auto debit), then you are either getting a bill once or twice a year for auto insurance. Why not save for that expense systematically? You should also always have a “car payment.” Whether you are actually paying down a car you already own or saving for the next vehicle purchase. A classic mistake consumers make is thinking that you are ever without an auto payment. Sooner or later you will need to replace your vehicle. How nice would it be to have the funds available to avoid the hassle of financing all over again?
#3. Medical Expenses
Some of these we simply can’t plan for. However if you know the kids will need braces, why not save for them now. This is especially true if you have an HSA (Health Savings Account). If you aren’t eligible for an HSA, find out if your employer offers a Flexible Spending Account (FSA) and see about taking advantage of some tax savings on money you set aside for these purposes. Be mindful that FSA money must be used up by year-end or it will be lost. So try not to save too much here in any one year, but it is hard to ignore the tax savings that can be had over time.
#4. Charitable Giving
First things first…if you don’t already have a designated month in the year that you make your contributions to your church, synagogue or favorite charities, now is the time to do it. If your charity month is September, then you have a perfect answer for anyone that calls you the other 11 months of the year to ask for money. If they want your support badly enough, they’ll pick up the phone again. Aside from that, take a look at what you donated in 2010 and figure out how much you want to give this year. Throw that in your monthly accrual.
Again, you’ll want to know how much you spent for birthdays, anniversaries, holidays and weddings for the year. Knowledge is power right? Setting aside the funds to cover these anticipated expenses is a brilliant way to start the year.
Certainly, you may find other recurring annual expenses that top your priority list, but the above will give you a few ideas of specific expense types for which you can start saving now.
The mechanics of monthly accrual are pretty simple. When you have found the amount you need to set aside each month, have it automatically taken out of your checking account and put into separate savings. You don’t need to have accounts set up for all these various expenses so long as you know how much of the account needs to be spent on each item. When it comes time to pay the bill, simply slide that money back into your checking account and viola! You have just kept your monthly expenses in the black.