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Our 'Non-monthly and Irregular Expense' Fund
Years ago, before we really took control of our finances, it seemed like every month was always 'feast or famine'. Sometimes, it seemed that we had money to spare, and other times, we came up with too much month left at the end of our money.
Then, about nine years ago, my wife and I read Mary Hunt's book "Debt-Proof Your Marriage," which we enjoyed. The most valuable piece of information we got from the book was something she called a 'freedom fund', an account used to save and pay for non-monthly and irregular expenses. I don't know why we hadn't thought of this before, but it made sense to us both.
The basic idea is that you take your anticipated non-monthly irregular expenses and then save for them on a monthly (or weekly) basis so that you have the funds available to pay for them when they arise.
A simple example would be vehicle taxes (i.e., license plates). These are usually paid annually, so you just take the annual expense (e.g., $180), divide it by your savings periods (e.g., 12 months), and then save that amount each period (e.g., $15 per month). You then do this for all of your irregular expense categories, refining your estimated expenses as you go.
This has worked fantastically for us. Things that used to be 'mini cashflow emergencies' have simply disappeared. Paying for birthday presents, repairs to a central air conditioner, and future travels all at the same time ceased to be a problem.
In reality, things like home and vehicle repairs shouldn't be an emergency for most folks because these are largely expected expenses. It's not a matter of if but when. It shouldn't be a bolt from the blue to anyone that home appliances won't last forever and that tires need to be periodically replaced.
We keep a good portion of our 'freedom fund' as a savings account with Ally bank, and I track all of the categories for expenses in an Excel spreadsheet. I make note of our monthly credits and debits each category as well as our remaining balance in each category. Most months, we have a net inflow to the account, but sometimes we have a net outflow. After having done this for years, we now have very good estimates for what we need in each category, but we still tweak it as needed.
As you can see above, we have many non-monthly and/or irregular categories. During this time of year, we're spending a lot from our 'gifts' category, but we've been saving for it throughout the year, and we have enough to cover our expenses. We pay our property taxes semi-annually, and when I get our property tax notice for the following year, I adjust the amount we save monthly accordingly. We get a discount on our RV insurance by paying it annually, so we save for it monthly.
On occasion, we have found that we need to spend more than what we have saved in a particular category. This has not been a problem as one category may be in the red, but there is enough 'black' in the others to cover the temporary shortfall. When this has happened, we usually find that we just need to increase our savings for the short category going forward and are back in black across the board in short order. If it's a discretionary expense, such as clothing, we usually refuse to spend what we don't have already saved in that category.
Since we've done this, I can honestly say that we have not had a single month where we encountered a necessary expense we had saved for that we didn't have the funds to immediately cover. We've had unexpected expenses come up, like when I made a stupid mistake and blew out both tires on one side of our car, but we've always had enough to cover them. Those things that used to be 'emergency expenses' and resulted in the 'feast or famine' we experienced before have just vanished.
We have saved enough over the years in the auto and home maintenance categories that this fund has grown to a fairly sizable amount (by our standards), significantly more than we were likely to need at one time. As such, when inflation shot up last year, we decided to put a big portion of the fund into I bonds. This involved 'locking up' those funds for a year, but we felt comfortable with that small amount of risk in return for at least keeping pace with inflation on a pre-tax basis on those funds. Now that the one year 'lockup' period is over, we could redeem the I bonds whenever we need to and just take the six month interest penalty if we redeem them before they are 5 years old.
All this undoubtedly seems overly complicated to some, who wish to merely keep a fairly large balance in a checking or savings account, pay for non-monthly and irregular expenses from that account, and replenish it as needed, which is fine. But our approach is a bit 'leaner', and I don't mind the 10 minutes or so it takes to enter transactions each month and transfer the needed funds.
While the categories we save for do not include such expenses as large medical bills or a job loss since we have an HSA for medical expenses and my employment is very secure since I work under a long-term contract, but those categories and any others you desire could certainly be included in such a fund.
Mary Hunt's 'freedom fund' has certainly helped us to smooth out our monthly expenses, enabled us to better plan for our expenses, and helped us to not spend funds that we didn't have. Perhaps it could do the same for you or someone you know.
