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Anticipate Your Way to Freedom

Try this: Add up your monthly expenses and deduct the total from your monthly income. Hey, not bad! You should have plenty of money with some left over. So why is there never enough? The answer is your selective amnesia. Most of us suffer from it.

We conveniently don’t remember expenses that don’t recur every month. It’s easy in March to forget about summer vacation, back-to-school clothes, wedding and shower gifts, new refrigerators, or myriad other inevitable expenses. The solution is to make all of your expenses as predictable as the rent, phone, and cable TV bill.

A man and a woman using a laptop computer

I call my solution a “Freedom Account.” It’s a simple account you set up for yourself an you name it Freedom Account. It forces us to anticipate irregular expenses so we can finance our own emergencies. It will bring freedom to your life like you could never imagine.

If you remember Christmas Club Accounts, you’ll understand my Freedom Account. Basically you determined how much you would need for Christmas shopping. You authorized the bank to transfer 1/52 each week (or 1/12 if you did it monthly) from your checking account to your Christmas Club Account. It was painless because you didn’t miss money you didn’t see and the results were huge. You got a big fat check in the mail for holiday shopping.

Step 1: Determine irregular expenses

Make a list of your non-monthly expenses and an annual amount for each (estimate if you don’t know). Divide by 12. This is the amount you need set aside each month. For example:

Auto Maint $900/yr / 12 = $75/mo.

Auto Ins $540/yr / 12 = $45/mo.

Christmas $800/yr / 12 = $66/mo.

Property Taxes $600/yr / 12 = $50/mo.

Vacation $720/yr / 12 = $60/mo.

Clothing $600/yr / 12 = $50/mo.

Total $346/mo.

Step 2: Open another checking account

You must have two active checking accounts for this to work and you will need personalized checks for it, too. Continue to deposit your paychecks into your regular checking account.

Step 3: Authorize an automatic deposit

Using your bank’s money transfer authorization service, fill out the necessary form to instruct the bank to transfer the monthly total (in this example it is $346) from your regular checking account into your Freedom Account.

Step 4: Get a notebook

Any 3-ring binder will do or you could do this on your computer or mobile device. You want a separate page for each of your categories, to record its specific activity. At the top of the page write the name of that sub-account and the amount to be deposited into it each month. I keep my accounting very simple. I can see at a glance the balance in each of my sub-accounts.

Step 5: Manage your Freedom Account

You have a new monthly expense, in this example it is $346. Like your car payment, your rent or your mortgage you know it’s coming, you know how much it’s going to be and it will become comfortable. It will take you about 5 minutes each month to manage your Freedom Account. You will want to make sure you have a current balance in each sub account that reflects the deposit and any checks you’ve written during the month.

Now as you have an expense like a car repair, your auto insurance bill arrives and so forth, you write its check from your Freedom Account, recording that expenditure in your Freedom Account notebook, which reduces that particular sub account’s balance. Easy. And you’ll be giddy with joy knowing that you are prepared–you’ve already set aside and stipulated funds for something you anticipated.

The secret to breaking your dependence on credit cards is to begin anticipating your irregular expenses. Developing your own Freedom Account is a perfect way to do that.

The Freedom Account is one of the 5 Core Elements of Debt-Proof Living, and a complete chapter in my book Debt-Proof Living.

Question: How do you handle expenses that don’t occur every month, things like vacation, clothing and car repairs? I always read your comments and enjoy them!

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