Long Term Bills

I said in my last entry that I would talk about what I call long-term bills.  This isn't a new concept.  I've seen the idea called sinking fund, or a freedom fund.  All it really amounts to is taking bills that are substantial, due regularly, but infrequently, and putting a bit aside every month or every payday.  You may not see much point in it at first, when you think of the things that you could use that money for.  But a day will come when you are very glad that you did.  Today is one of those days for me.

August is one of those tight months for us.  Our car tags are up for renewal.  And the semi-annual car insurance bill is also due.  I spent just over $500 on Wednesday just on stuff to keep my car legal.  Before, this would have been a source of major stress and probably would have meant hitting the emergency fund.  But this morning when I sat down to pay the credit card, all I had to do was to move the money from the Long-Term Bill account to the CC Payment account.  Each month, the car tags end up being about $17.50 and the insurance about $60 (plus another $20 for the other car's insurance).  It's so much easier to put a little aside each month than to try to scramble up the money all at once.

I have several things that I use this technique with.  In addition to tags and insurance, I save a little for Christmas/Birthdays/other gift giving occasions each month.  I also have a couple of expensive hobbies.  Both tend to require large purchases during specific times of the year and it's very nice to have a fund when I need it because I set aside $20-40 a month during the off-season.  Psychologically, it's nice to have that money earmarked because I don't feel guilty about spending it on its intended purpose.

Account Setup

I want to talk a little today about how I have my accounts set up.  I have 5 checking accounts and 4 savings accounts.  Yeah, the tellers at my credit union probably think I'm nuts.  They are all connected online, so I can move my money around easily.  The separate accounts are just to keep things classified.  For those of you who are familiar with Dave Ramsey's teachings you can think of it as a digital envelope system.

The savings accounts are pretty straightforward.  There's our contingency fund, which is nothing more than an emergency fund.  It contains enough money to handle something like a broken water heater (BTDT) or blown transmission (crossing our fingers on that one).  Then there is the vacation fund.  I've mentioned before that travel is very important to us.  And while we do try to travel as cheaply as possible, we do regularly deposit money in the vacation fund.  Next is the overdraft account.  In theory, we should never have to use it, but there is enough in that to cover minor mistakes.  Finally is what we call the college fund.  It's money that we are saving for our son's college.  Every paycheck, we put a couple hundred dollars in it and then at the beginning of each year, we deposit that into a Roth IRA.  This account actually doubles as a longer-term savings account (for very, very dire situations only...think long term unemployment) because we didn't open the IRA until he was older and we are limited each year as to how much we can actually deposit.

The checking accounts are a little more interesting.  The first is the main account that paychecks are deposited into and money is disbursed out of.  That is the account that the cashflow planning tool creates.  It is the central account.  Then my husband and I each have our own checking accounts.  That way we are each handling our own day-to-day spending.  Next is the credit card payment account.  I try to treat credit cards like a debit card.  As soon as something is put on the card, the money is moved into the payment account.  Auto-pay for the full amount is set up on every card.  Are there occasions where I float a bill from one paycheck to another?  Of course.  And the planning tool lets me feel confident doing that.  If I know that "yeah, I don't have the money today, but I'll have it in  seven days" then I will do it.  I try not to float expenses that aren't already in the plan, but sometimes life happens.  The final account is the long-term bill account.  I'll talk a little more about long term bills later this week, but essentially this account is used for putting aside money to pay bills that only occur annually or quarterly or every six months.  There are two ways of doing this.  You can have one account for each bill (in which case, I'd probably use a savings account rather than a checking account).  Or you can use the long-term bill tab of the tool that will help track up to 12 different things.

Introducing the Cashflow Planning Tool

I put the instructions and link to my cashflow planning tool up today.  You can find the instructions for the tool here and it will link to the workbook on Google Docs.