How many times have you whipped out your credit card, raided your emergency fund or tapped your 401(k) to pay for an insurance premium, car-registration bill, vacation tab or holiday gifts?
These aren't unexpected costs. But because you pay for them only once or twice a year, they probably don't make it into your monthly budget. When these bills arrive, you find yourself scrambling to come up with the cash.
You can eliminate this stress and ensure that you always have the money when you need it by saving regularly for recurring expenses. We often think of savings as something that's untouchable. And that's certainly a great strategy for emergency funds and retirement accounts.
But you can use savings accounts as tools to help you make ends meet and organize your financial goals on a small scale, too. You should be saving money with the intention of spending it.
I like to think of this as my infomercial savings plan: Need to come up with $500 for car insurance? It can be yours in 12 easy payments of just $41.67! Break down big annual costs into easy-to-save chunks, and the money will be ready when you are.
How to set up your own plan
This may sound like a no-brainer, yet most people don't do it. Here's a simple step-by-step plan that'll get you organized in a matter of minutes:
STEP 1: Identify large recurring expenses. Some common ones are insurance premiums (homeowners or renters, car and life), car registration and inspections, vacations, home improvement, self-employment taxes and holiday gifts and travel.
STEP 2: Figure out your monthly costs. Divide the amount of each annual expense by 12 to figure out how much money you should be setting aside every month to cover those bills. For instance, if your home insurance is $600, your monthly payment would be $50 ($600 divided by 12 equals $50). And if you want to spend $300 on holiday gifts this year, you should set aside $25 each month.
STEP 3: Find the best place to open your accounts. Online savings accounts work great for this because your money is FDIC-insured, keeping it safe (opens in new tab). And they're accessible, but not too accessible (see 7 Great Online Bank Deals).
At outfits such as ING Direct, HSBC Direct and Emigrant Direct, you transfer money by linking your online account to your existing checking account. They don't have minimum-balance requirements, so you won't have to worry about getting slapped with a fee when you empty your account to pay the bill. With most online savings accounts, you can't get to the money from an ATM, and transfers usually take two to three business days -- so you won't be tempted to raid the money on an impulse.
And the best part about these online savings accounts is that they pay you interest. Most traditional bank savings accounts pay nothing or next to nothing, but online you can currently rake in about 1.5% on your savings. That amounts to $15 of free money for every $1,000 you stash. And who wants to pass up free money? (See Savings With a Kick to learn more.)
STEP 4: Open an account for each goal. Don't open just one account: It's too easy to lose track of how much money you've allocated toward each goal. Separate your apples from your oranges by opening an account for each one.
For instance, at ING Direct, you go to the Web site to open your first account. You can give it a nickname, such as "car insurance." Then, while you're logged in to that account, click on "open an account" and you can quickly open a second account, give it a nickname and then repeat for however many categories you need. Every time you log in using your customer number, you're taken to a screen showing a list of all your accounts. The sky's the limit: I have ten savings accounts at ING for my various small goals. This helps me stay organized and focused.
STEP 5: Put your savings on autopilot. You determined your monthly costs in step 2. Ensure you make those payments to yourself by arranging for the online bank to draw the money automatically from your checking account each month. You can set up automatic savings in about one minute, and it's the key to making this project work. It forces you to save -- yet because you're not physically doing the transfer each time, you hardly miss the money when it's gone.
STEP 6: Transfer and review. When your preplanned expenses come up, all you need to do is transfer the money from your savings back into your linked checking account to pay the bill. (Remember that transfers can take a couple days, so don't wait until the day the bill is due.)
Remember that expenses are rarely fixed year by year. Your insurance rate could go up, for example, or some years you may plan to spend more on vacations than others. So you should recalculate your monthly payments at least once a year.
STEP 7: Make room in your budget. Breaking these payments into small chunks certainly makes saving easier, but you may need to reassess your overall budget to make room for your increased monthly expenses. Look for areas in which you might be able to cut back to free up that $41.67 per month for car insurance, for example. See Save Money on Practically Everything for ideas.
STEP 8: Practice saving for big changes to your budget. Now everything is set up and running like a well-oiled machine. You may have to make slight tweaks here and there as you go. And eventually you'll probably face a big change to your budget or income for which you'll want to be prepared.
For instance, say you want to buy a car or a home. To ensure that you'll have enough money to make the new monthly payments, figure out how much extra it will cost you per month and start kicking that amount into a savings account for at least three months beforehand. This allows you to practice paying that bill to see if you can afford it before you sign on the line.
The same goes for changes to your income. Say one parent wants to stay home to raise the children. To see if you can afford to live on one paycheck, practice it for a few months by socking away the quitting parent's income into a savings account.
I have personally put that last tip to the test. For the past few months, my husband and I have been practicing living on only one salary. After nine years at Kiplinger, I'm resigning to spend more time with my growing family.
This will be my final Starting Out column. But rest assured, someone soon will pick up the post and continue giving the quality financial advice for young adults that you'd expect from Kiplinger. (Sign up (opens in new tab) to be notified via email when the new Starting Out columnist is up and running.)
Thank you for your readership, your questions and your comments over the years. I feel like we've grown in our financial education together, and I wish you all the best for your future.
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