Saturday, March 3, 2012

Account Oriented Budgeting

So I opened up my Kiplinger’s (April 2012) today, the one with “50 Top Money Tips” on the cover, to find the #5 money tip is “Set up an account for each goal – education, vacation, car, computer – or large, recurring expenses, such as insurance premiums.”  I called up to my wife and exclaimed, “Now Kiplinger’s is recommending the separate savings accounts!”   And my family thought I was crazy!  OK, just a little!

Too many times I had spent the utility money on something other than utilities because all of my money was lumped together in one account. I said, “Enough!”  I decided to save my money by category.  My goal was to have enough money, at the beginning of the next month, to pay my bills; to pay cash for my next car; to have our disability insurance paid for when the annual premiums come due in November; to have our dog Ella’s annual vet visit paid for when she has her checkups in March; to have my next oil change paid for when I roll into the oil change place...I think you get the point.  I call it account oriented budgeting!  

I have a pretty good idea of the things that we’re going to have to pay for throughout the year.  Of course things pop up (that’s why we have an emergency fund) but I wanted to be prepared for the monthly, quarterly, yearly (or longer) expense that I know are going to happen.  As I mentioned in the Financial Planning Basics page, I have a savings accounts for each of these recurring expenses. 
For example, I know every 10 days we have to fill the tanks of our cars; every 3 months we have to have the cars oil changed; every month our car insurance is due; every few years we have to put new tires on the cars and, eventually, we’ll have to replace the cars.  I sat down and calculated each recurring expense and came up with a monthly amount for that category.  

Oil changes:  2 cars @ $30 every 3 months, we save $20 a month in the budget. 
Gas (assuming $4 a gallon) we save $340 a month.  

The Gas and Oil category gets $400 a month (I round up to the nearest $10 because over time it creates a nice little buffer in that category).   You can see how this works below in the rest of the “Transportation” portion of our budget.                                     

                Car Replacement             200                        
                Gas and Oil                      400                        
                Repairs and Tires             60                          
                Car Insurance                   80                          
                License and Taxes            10                                                                                                          
                Total                                 750         Pay Period          375

Every dollar has its savings account! Most banks will allow you to set up as many savings accounts as you want without charging you extra fees.  

You may think that this is hard to manage but it’s not.   If you sit down and budget every month, you can group your budget into categories (e.g.  – Transportation, Insurance, Housing, etc) and come up with a Pay Period amount that you transfer every pay period.  Our budget is a spreadsheet that has each category listed and the pay period amount.  Every two weeks when we get paid, I open our budget and I spend 5 minutes transferring the pay period amount from checking to the appropriate savings account.  

Every month when I pay the bills, I look at our bank accounts and I know we haven’t spent the gas money on groceries, or the vet money on disability insurance.  For an initial set up of an hour or so you can put your finances on auto pilot.  Did you ever think your finances would be on auto pilot?  Try account oriented budgeting and they will be.

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