Freedom Account - Saving for Irregular Expenses
Have you ever heard of Mary Hunt? She has lots of great books dealing with finances. The first one I read was called Debt-Proof Living. This book changed my life. Why? Because of something called a Freedom Account. The idea of a Freedom Account, or even the concept was totally new to me.
So what is a Freedom Account? It is a separate bank account where you set aside money each month to cover those "unexpected" expenses, as well as the expected, but irregular expenses. Setting aside money for these things each month allows you the freedom to not worry about how you are going to cover these expenses.
By "unexpected" expense, I mean things like car repairs or household repairs that are really to be expected. Any time you own a car or a house, you have to expect that something will go wrong. Or even that something will need routine maintenance to keep it working properly. Things break! The only unexpected part should be when will you have to pay for these things. There is no if, but only when.
Irregular bills for us include newspaper subscription, sewer, and trash pickup, as we pay these bills quarterly. At other times in our life this account has included home owner association dues and union dues. We also have sections for car insurance and registration, car repairs, home and yard, kids activities, vacation, Christmas, memberships, and school supplies. Other people include things like medical expenses and clothing.
Some sections such as kids activities and vacations are not regular expenses at all. However we love having money set aside already to pay for soccer in the fall, or a vacation in the summer. Having money in these accounts allows us the freedom to say yes to things, that before we never seemed to have the money for.
You can set your Freedom Account up a couple of different ways. A lot of people have a separate checking account and always use it to pay for something that should come out of the Freedom Account. I have a savings account connected to my checking account and whenever I pay for something that should come out of the Freedom Account I just make a transfer into my checking.
I have a three ring binder that I set up to divide this account into all the little sections I need. I have a page for each section. Once a month I spend about 10 minutes adding in the deposits into each section. How do you decide how much to put into each section? Trial and error in many cases. Some things, like bills are easy to determine. If the trash bill is $75 every three months, you deposit $25 each month into that section. Other things like car repair is harder to decide. We have adjusted ours many times over the years. We started by putting $50 a month into the car repair account. But as our cars have gotten older we have had to increase that amount and it is now at $90 a month. Looking at past expenses can help you decide how much to put into each section.
When we were hit with over $1000 in car repairs in November it was frustrating yes, but stressful? No. We had the money set aside and it just made life so much easier. We didn't have to worry. However that definitely wiped out that section of the account, so we worked hard to rebuild it as quickly as possible. We didn't want to have another repair come up and have no money set aside. Now that would be stressful. Planning ahead for these expenses makes life run so much smoother.
Getting started can be difficult. Especially if you get hit with expenses right away. We plugged along at this adding what we could each month, until we received a large check for some extra work. Then we were really able to add to these accounts the money they needed to make our lives less stressful. Once we had the account built up some it was so freeing.
Usually these unexpected, irregular expenses don't hit all at once. You might add money to the household repair account for a full year without ever really needing it. But when the washing machine breaks down and you need to buy a new one, you will be so thankful you have the money set aside. When expenses do hit several at a time you will be even more thankful that you have your Freedom Account in place.
Having a Freedom Account has made our lives so much easier. No more wondering how we were going to pay the car insurance bill due that month. No more worrying about how we were going to buy Christmas presents. No using the credit card to pay for car repairs and trying to figure out how to pay for it later. Having the Freedom Account in place has defnitely been one of the best financial moves we have ever made.