Good budgeting is an important part of financial security. Most people understand the basic concept of setting and keeping to a budget, so I won’t discuss that here.
What I want to tell you about is a method of executing part of your budget that you might not have thought about before.
Most of us have at one time or another been “surprised” by those recurring but infrequent expenses like vehicle registrations and insurance premiums that seem to come due at the most inopportune times. It is also too easy to let expenses like birthdays or Christmas sneak upon us.
It can be a budget crunch that month to pay the large bill and make sure we still have enough money for all those other bills plus groceries and incidentals. This might drive you to use a credit card knowing you will not be able to pay the bill in full next month. In turn, that means you are paying interest on top of your other bills. It is a vicious cycle that will leave little opportunity to put any money away in savings for a rainy day.
One way to avoid these problems is by planning out in advance how to pay these bills and other expenses like a family vacation that is on the horizon but not frequent enough to demand our constant attention. The best way to do this is by figuring how much it costs you on a monthly basis and set aside that much each month instead of having a large bill shocker a few times every year. For example, if your insurance is $600 every six months, simply set aside $100 each month.
If you have access to online banking this can be easily automated. Rather than putting cash in envelopes under your mattress, most banks or credit unions will allow you to set up multiple checking and/or savings accounts for no extra fees. For example, in addition to your regular checking and savings accounts, you could establish one for recurring expenses.
Use savings whenever possible as it usually provides a higher interest rate than checking, but be sure to look into how often you can withdraw from the account without incurring any penalties before you decide. Now set up an automatic transfer every pay period from your main account to this bill paying account and you have done two very important things for yourself.
First, you are not relying on that money each month (it’s not in your main account, so out of sight out of mind), and you can budget around the loss. Second, when the bills come due you will have the money ready to pay without any problem, and will have even earned a bit of interest to boot.
You can get as adventurous as you like with this and set up a separate account for emergency savings, insurance bills, gifts (e.g. Christmas and birthdays), family vacations, school clothes, and supplies, etc. Be sure to check with your banking institution first to ensure there are no hidden fees or a limit on the number of accounts you can establish under your name.
You will find an increased sense of financial security and peace of mind as you prepare yourself to deal with year-round budgeting rather than trying to make do on a month-to-month basis.