Charlotte wrote recently to share a new system she’s developed for handling her non-monthly expenses. She calls it “personal escrow”.
Most homeowners are familiar with the notion of escrow. Each month’s mortgage payment goes not only toward principal and interest, but also to fund an escrow account. From this escrow account, the mortgage company pays property taxes and homeowners insurance.
Charlotte uses the same idea for certain other expenses in her life. First, she totaled her quarterly, semi-annual and annual bills, and divided the result by 12 to get a monthly subtotal:
- $200 — Gym, annual
- $1000 — Car Insurance, semi-annual ($500×2)
- $300 — Rental property insurance, annual
- $32 — Magazines, annual
- $45 — Costco membership, annual
TOTAL: $1577 divided by 12 = $132/month
Next, Charlotte opened a separate bank account designated for personal escrow. She automatically transfers a fixed amount ($132) to this account every month. Meanwhile, she’s set up automatic payments from this account to her non-monthly obligations. For her, this is an easy, painless way to budget. It turns irregular expenses into fixed expenses.
If you use this system, it’s important to do some calculations at the start of each year to be sure you’ll have enough when each bill comes due. Charlotte decided that in order to make this work for her, she needed to start with $500 in the account.
This personal escrow approach is similar to Mary Hunt’s Freedom Account, which uses some of the same techniques to prepare for unexpected or irregular expenses like car repairs, vacations, and clothing.
A personal escrow account may seem more complex than necessary for some people, but for others, like Charlotte, it can be an excellent budgeting tool. How do you handle non-monthly expenses?