Don’t Fool Yourself By Not Expecting Expenses
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In the last couple of years my account was always empty at the end of the month. If I was lucky. I lived “paycheck to paycheck”. Over the year, I could always somehow reach a black zero while putting a little bit aside for retirement, but it never felt very comfortably. Often I ended up month after month pretty deep in the reds, waiting for that tax refund (or overtime premium) to save me.
At some point, I decided to change this. My first step was, to really identify the problem. I tried to cut back here and there. I don’t live very wasteful, and reducing the numbers of restaurant visits only helped short term. Somehow, at some point, I was back in the reds.
I realized, what dragged me down, were “unexpected” expenses.
Those “unexpected” expenses, like the car insurance which has to be paid every six months, or this summer vacation I planned since last summer…
No surprise, I wasn’t the first one who identified this problem and therefor a proper solution was already on the internet:
http://www.getrichslowly.org/blog/2008/05/12/use-a-freedom-account-to-prepare-for-the-unexpected/
Inspired by Mary Hunt’s (@DeptProofLiving) book “Debt-Proof Living”, J. D. Roth (@jdroth) wrote the linked blog post, which boils down into the idea of the FreedomAccount:
An additional account where you save for the expected, irregular expenses by following 5 steps:
1. Determine your irregular, unexpected, and intermittent expenses.
2. Open a second checking account.
3. Authorize an automatic deposit.
4. Start a logbook.
5. Make a deposit every month.
When you have determined your irregular, unexpected and intermittent expenses, sum them up so you know how much you have to save for them in one year and then authorize an automatic deposit to the amount of 1/12th of the calculated sum per month.
Then keep track of your FreedomAccount balance and the expenses. This is important for two things:
- Adapt the monthly deposit to the real expenses.
At the least after 12 months, you should go back to Step 1 and reevaluate the needed monthly deposit. Your insurance rate will have changed and now you’ll know your car, and its need for repairs, even better. - Keep the expenses separate!
If your car breaks and needs new brakes, you should not use the money you saved for the yearly health insurance rate which will come up in three months. Because otherwise you’ll have a feeling of false security. The other bill will still come up.
So you should only use as much money for the car as you have saved for the car. The missing funds should come from your regular bank account or, even better, from your Emergency Account.
My Freedom Account
For keeping this logbook as comfortable as possible, I created a Microsoft Excel spreadsheet (with some VBA).
It gives you an at-a-glance overview over your Freedom Account.
You can click on a sub-account to jump to the work sheet.
Creating a new sub-account can be done by clicking the “New Sub-Account” button.
On the sub-account’s sheet you can add expenses and trigger a down payment.
What’s Next?
The design and the naming of some things is far away from perfect. I plan to update the file at least once per year.
I’m also thinking about a VBA-free version. Of course, I would loose a lot of functionality, but it could run in Excel Online and those Excel mobile app.
Where To Get It?
You can use the GitHub repository
or use the following direct link:
Compatibility?
Tested with Microsoft Excel 2010. Should be working with all newer versions and probably also with most older versions, since it doesn’t use many fancy things.
Feedback?
Yes, PLEASE! I would love to get some feedback!
Feel free to leave me a comment on this post, via Twitter or on GitHub.
Publication?
I’m looking to add this article to a publication. If you manage one about money/personal finance, please contact me.
