Ok, so that headline might be mildly deceptive…
I’m not giving you permission to run out to the mall for an impromptu spending spree so put your wallet down, but did you know that there are 3 types of savings accounts that we should all have and that one of them is meant to be spent? Today I’m going to tell you all about that kind of savings.
When clients start working with me we often begin by focusing on a type of savings we call PERIODIC SAVINGS. (NOTE: I recommend this being the savings account tied to your checking for easy access. Other savings accounts, like an emergency fund, or retirement savings should go into a separate account, like an online savings that is harder to access.) Periodic Savings is a savings account for expenses that come up periodically as opposed to monthly. They could be things you know are coming because they come up every few months (like union dues, tuition payments or quarterly taxes), every 6 months (like car insurance premiums or property taxes) or yearly (like a birthday or your Amazon prime membership- surprise there’s $100 auto-charged to your account that you probably forgot all about!). They can also be expenses that you anticipate but that have more fluidity surrounding them about when you will need the money (like new brakes for a car, i.e. your mechanic mentioned you are due for brakes in the next 3 months, or maybe a repair around the house that is looming, i.e. your washing machine is making that weird noise again).
Here’s what happens when you don’t have a special savings account for your periodic expenses. If you are like most people you either try to squeeze the money out of somewhere (you know what I am talking about!), or you end up reaching for that credit card you swore you were never going to use, or even worse skipping the payment/expense altogether. Let’s use quarterly taxes as an example and assume you owe Uncle Sam $500 in anticipated taxes every 3 months. Likely when that bill is due you have an oh, sh*t! moment and have to decide do I... A) pay it and eat nothing but ramen for the rest of the month and hitchhike to work, B) skip the payment and try to make a double payment plus the fines next time, or C) put it on the credit card and eventually (we all know how that goes right?!?) pay it off. Personally none of those options sound very good to me so I am going to provide you with a fourth option. Option D) pull it from your periodic savings, pay the bill and then continue on your merry way.
Sounds pretty great right?
Here are the 3 steps you need to take that will keep you on your merry way.
STEP 1. Know your periodic expenses. How can you decide how much you need to save ahead of time if you don’t think about the expense until the bill is sitting in front of you demanding to be paid? Here’s how...
Here’s an example:
I’m not giving you permission to run out to the mall for an impromptu spending spree so put your wallet down, but did you know that there are 3 types of savings accounts that we should all have and that one of them is meant to be spent? Today I’m going to tell you all about that kind of savings.
When clients start working with me we often begin by focusing on a type of savings we call PERIODIC SAVINGS. (NOTE: I recommend this being the savings account tied to your checking for easy access. Other savings accounts, like an emergency fund, or retirement savings should go into a separate account, like an online savings that is harder to access.) Periodic Savings is a savings account for expenses that come up periodically as opposed to monthly. They could be things you know are coming because they come up every few months (like union dues, tuition payments or quarterly taxes), every 6 months (like car insurance premiums or property taxes) or yearly (like a birthday or your Amazon prime membership- surprise there’s $100 auto-charged to your account that you probably forgot all about!). They can also be expenses that you anticipate but that have more fluidity surrounding them about when you will need the money (like new brakes for a car, i.e. your mechanic mentioned you are due for brakes in the next 3 months, or maybe a repair around the house that is looming, i.e. your washing machine is making that weird noise again).
Here’s what happens when you don’t have a special savings account for your periodic expenses. If you are like most people you either try to squeeze the money out of somewhere (you know what I am talking about!), or you end up reaching for that credit card you swore you were never going to use, or even worse skipping the payment/expense altogether. Let’s use quarterly taxes as an example and assume you owe Uncle Sam $500 in anticipated taxes every 3 months. Likely when that bill is due you have an oh, sh*t! moment and have to decide do I... A) pay it and eat nothing but ramen for the rest of the month and hitchhike to work, B) skip the payment and try to make a double payment plus the fines next time, or C) put it on the credit card and eventually (we all know how that goes right?!?) pay it off. Personally none of those options sound very good to me so I am going to provide you with a fourth option. Option D) pull it from your periodic savings, pay the bill and then continue on your merry way.
Sounds pretty great right?
Here are the 3 steps you need to take that will keep you on your merry way.
STEP 1. Know your periodic expenses. How can you decide how much you need to save ahead of time if you don’t think about the expense until the bill is sitting in front of you demanding to be paid? Here’s how...
- Create a quick spreadsheet with the following headers across the top (see image below). Expense-Jan-Feb-March etc all the way to Dec and lastly, one for Total.
- List all the periodic expenses you can think of in the first column. Spend some time thinking about all the things you wish you had been prepared for last year.
- Put the amount associated with each expense in the appropriate month(s) column.
- Add up each month to see how much “extra” cash (above and beyond your normal monthly spending) you will need for any given month. Some months might be zero and some might be quite heavy.
- Add up the entire year to see how much “extra” cash you need each year beyond just your average monthly expenses.
Here’s an example:
STEP 2. Decide how much you need to save every month to avoid options A, B, & C above!
That sounds easy enough and it might be as simple as taking the yearly total of all periodic expenses and dividing by 12 to figure out how much you need to save every month. If we use our example above it would be $566 each month. ($6791.91 ÷ 12 = $565.99).
However, (yes, there’s always a however) let’s pretend we are currently in the month of February. As you can see from our chart above, April is a big month with $2107.91 due for property taxes and our annual Amazon Prime renewal. Even if we were to save the $566 we just calculated during the months of February, March and April we would still be short by $1085.91. Yikes! Wait, how did you get that math?
Let’s take a closer look at the totals we need for the first few months of the year.
Since we are pretending it is February and we intend to save $566 this month, we can't forget to factor in that we need $211 of that savings to use towards union dues (February's periodic expense), leaving us with $355 in the savings account. Then in March we will add another $566 to our savings and have a total of $921 in the bank. But wait, car insurance is due in March so we will need to pull $465 out for that meaning we will be left with only $456 in savings. Now April rolls around and once we get our paycheck we add our monthly $566 to the savings for a total of $1022. The issue is that $1022 is nowhere near the $2107.91 we need in April. Oh sh*t, right?
So, instead of just dividing the entire yearly amount by 12 like we first did, we are going to have to do a little creative math.
Again, let's pretend we are currently in the month of February. The good news is that we’ve already managed to cover the January expenses and they won’t roll around again until next year, phew! Now we just need to tackle the next 3 months! If we total up all the expenses that occur between February-April we are looking at $2783.91. Since all of this needs to be accomplished in 3 months lets divide that total by 3.
2783.91 ÷ 3 = $927.97
Yikes, that’s a lot to save each month! These next few months are going to be rough but the good news is that after that it is smooth sailing ahead. C'mon, you can do anything for a few months especially knowing that the alternative is ramen and hitchhiking!
Now we just need to figure out the rest of the year…
So, instead of just dividing the entire yearly amount by 12 like we first did, we are going to have to do a little creative math.
Again, let's pretend we are currently in the month of February. The good news is that we’ve already managed to cover the January expenses and they won’t roll around again until next year, phew! Now we just need to tackle the next 3 months! If we total up all the expenses that occur between February-April we are looking at $2783.91. Since all of this needs to be accomplished in 3 months lets divide that total by 3.
2783.91 ÷ 3 = $927.97
Yikes, that’s a lot to save each month! These next few months are going to be rough but the good news is that after that it is smooth sailing ahead. C'mon, you can do anything for a few months especially knowing that the alternative is ramen and hitchhiking!
Now we just need to figure out the rest of the year…
With Jan-April out of the picture the expenses for the rest of the year add up to $3908.00. If we divide that by the 8 months we have left to save (May-Dec) then we only need to save $488.50 per month. However, if you can challenge yourself to save the $566 we talked about earlier then you will be in fantastic shape when next April rolls around again! Or if you can challenge yourself to save above and beyond the $566 (maybe round it up to $600) you will be well on your way to starting your emergency savings fund!
STEP 3. Figure out how you are going to “find” the money to save!
THIS IS THE HARDEST STEP OF ALL! This is the step that will probably put some hair on your chest. It’s time to take a good, HONEST, look at your spending. It may feel uncomfortable but sometimes the things that do us the most good feel terrible at first, like sit ups or salad in my case.
Are there places in your spending you can scale back? Probably. You may not want to do it but if you don’t make sacrifices your financial situation is going to stay exactly the same... and you wouldn’t be reading this if you were content where you are. (If you haven’t already done so, read this article for some ideas on how to cut costs without making sacrifices.) In fact, if you start tracking (writing down) where your money is actually being spent versus where you think it is being spent, I’m sure you will find that you are leaking money on things that you won’t miss at all. I personally tend to leak money on magazines that I never end up reading. Maybe you leak money at Starbucks and can make coffee at home. Maybe you spend more money than you realized on going out to dinner just to hang with friends? Perhaps have a pot luck bbq instead or a make your own pizza night. Coming up with creative ways to cut back can actually be fun!
If it comes down to it, another way to find extra cash is to figure out a way to bring in more money? Raise your rates? Ask for a raise? Work overtime? Have a yard sale? Start an Etsy store? Here’s your chance to be creative and think outside the box! Who knows, you might just come up with the next big idea!
As with most new habits it takes about 4o days to really cement them into place but you can absolutely do it. Just keep at it, and as always, if you need that extra helping hand I am here for you. All you need to do is reach out!
Cheers!
STEP 3. Figure out how you are going to “find” the money to save!
THIS IS THE HARDEST STEP OF ALL! This is the step that will probably put some hair on your chest. It’s time to take a good, HONEST, look at your spending. It may feel uncomfortable but sometimes the things that do us the most good feel terrible at first, like sit ups or salad in my case.
Are there places in your spending you can scale back? Probably. You may not want to do it but if you don’t make sacrifices your financial situation is going to stay exactly the same... and you wouldn’t be reading this if you were content where you are. (If you haven’t already done so, read this article for some ideas on how to cut costs without making sacrifices.) In fact, if you start tracking (writing down) where your money is actually being spent versus where you think it is being spent, I’m sure you will find that you are leaking money on things that you won’t miss at all. I personally tend to leak money on magazines that I never end up reading. Maybe you leak money at Starbucks and can make coffee at home. Maybe you spend more money than you realized on going out to dinner just to hang with friends? Perhaps have a pot luck bbq instead or a make your own pizza night. Coming up with creative ways to cut back can actually be fun!
If it comes down to it, another way to find extra cash is to figure out a way to bring in more money? Raise your rates? Ask for a raise? Work overtime? Have a yard sale? Start an Etsy store? Here’s your chance to be creative and think outside the box! Who knows, you might just come up with the next big idea!
As with most new habits it takes about 4o days to really cement them into place but you can absolutely do it. Just keep at it, and as always, if you need that extra helping hand I am here for you. All you need to do is reach out!
Cheers!
