Manage Your Money With a “Preparation” Account

After awhile, you probably fall into a routine. You are making your monthly payments with your income as-is; and it's easy to take on some additional debt – like using the credit card to buy something for a few hundred dollars because you know the monthly payment will only be another $25 or so. You might even have a hundred bucks left over in the checking account once in awhile, and figure it's a good time to take yourself out to dinner! This is where the problem sets in, though. When we get comfortable with the routine monthly expenses, we tend to start spending a bit more and before we know it- our income and expenses are almost exactly the same every month. If we don't do something about it, it won't be long before your expenses are more than you earn each month.

Consider this: What would happen if your mortgage or rent, or the car payment that you pay on a monthly basis was changed to an annual payment? Would you be disciplined enough to set aside a twelfth of your annual payment each month so you have the money saved when the annual payment came due? For most people, the answer is no. In fact, most of us would probably feel excited about not having to pay that $1,000 a month and only a small percentage of us would be overcome with fear and realize that $1,000 a month has to be saved in order to pay the full annual amount when due!

Controlling your financial situation involves knowing what your personal finances are on a monthly and annual basis – both your fixed expenses and the irregular expenses. The trick is to prepare for the irregular expenses BEFORE they happen, so you're not tempted to borrow or use credit cards when the “unexpected” car repairs are needed, or the water heater in the house breaks, etc.

Open a Preparation Account

Step 1: Get out last year's check register, online bank statements or whatever you use to keep track (as much as possible) your payments. Create a list of everything that you don't pay on a regular monthly basis – so sometimes you might pay a bill quarterly or semi-annually or annually. You might buy clothing a few times a year, life insurance, take a vacation once each year, etc. Whatever it is, write down each of the irregular expenses and find out your annual amount for each irregular expense, and then divide by 12 in order to get the monthly amount. What is the total of irregular expenses?

Step 2: Open a second checking account if you already have one (at the same bank where you have your existing account), or open two accounts at the same time if you don't already have a checking account. One will be your “regular account” and the other will be your “preparation account”. Don't get an ATM card for the preparation account. Use the regular account as usual to accommodate your regular monthly expenses and deposit your income.

Step 3: Set up an automatic transfer between your regular account and your preparation account for the total amount of irregular expenses. If you spend $300 a month in irregular expenses (as figured in step 1), you want to transfer that amount each month from your regular account into your preparation account. You can do this in a single monthly payment or divide it up weekly or bi-weekly (however you get your paycheck).

Step 4: In a notebook, on your computer, or in a check register, create a section for each of your irregular expenses. You might have a category for clothing, another for property or school taxes, one for car maintenance, etc. You are going to treat this preparation account as if it is four, five, or six different accounts (however many irregular expenses you determined you have), and record deposits and withdrawals on a monthly basis according to what you determined you spend on a monthly basis.

Confused? Let me show you an example.

Let's say your irregular expenses come out to be the following:

Clothing: $400 annually or $33.33 per month

Property Taxes: $2000 annually, or $166.66 per month

Car maintenance: $850 annually, or $70.83 per month

Vacation: $700 annually, or $58.33 per month




Total irregular expenses per month: $329.15

This is the amount of money that will be transferred from the regular checking account into the preparation account on a monthly basis. You are “preparing” for the expenses you aren't required to pay monthly so that you don't have to come up with the money all at once; and so you aren't spending more than you really have to spend.

In a notebook, you would then create 4 sections based on this example, one for clothing, one for property taxes, car maintenance and one for vacation. Within each section, you're going to use it like a check register and add in each deposit for the individual categories every time your money is transferred between the accounts.

This money is committed to each of these categories and this is not a savings account – don't even think about dipping into it when you need extra cash for something else! Continue the automatic transfers of money each month, and writing in your deposits within each category as if you are making separate transactions in separate accounts.

When it comes time to get an oil change for the car, or you need a new pair of shoes to go with an outfit for a work event, you have prepared for these “unexpected” events. You then withdraw the amount of money you need from your preparation account, and make the appropriate debit in your notebook or check register as you normally would.

It may seem silly to keep the notebook (or spreadsheet or actual check registers) for each irregular category you have; but you are teaching yourself how to manage your money in a way that works. You may have to make adjustments to the amount you need within each category every so often- but this is a fool proof way to manage your money more effectively.