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Use a Personal Escrow Account to Budget for Non-Monthly Expenses
Monday, 7th July 2008 (by J.D.)This article is about Budgeting, Money Hacks
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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?
47 Responses to “Use a Personal Escrow Account to Budget for Non-Monthly Expenses”
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July 7th, 2008 at 5:19 am
I think you could go even further than automating the bill payments–you could (at least with my bank) have the amount automatically taken from your pay when it gets deposited and not even have to think about some of these things.
July 7th, 2008 at 5:28 am
I do exactly the same as Charlotte and it works brilliantly. My categories are obviously different, but the principle is the same. It was great when I had an car repair bill recently that the money was already set aside for it.
July 7th, 2008 at 5:40 am
I am able to pay auto insurance premiums monthly without additional service charges, so that is how I handle those. For property taxes on the vehicles, vehicle licensing, and Christmas expenses (I can’t think of any other non-monthly bills we have)I do something similar to Charlotte’s escrow account. The difference is that I don’t have them in a separate bank account; they are, however, in a separate category in our budgeting program.
July 7th, 2008 at 5:58 am
We have a personal escrow account for car and ring insurance.
We also manage our own escrow payments for real estate taxes and home/wind insurance for our primary home and rental properties. Instead of making escrow payments to the bank each month we deposit the escrow payment in our ING account and then pay the annual expense ourselves. Instead of the bank earning interest on our escrow monies we earn the interest and as a result it lowers the annual expense each year (we reduce our monthly escrow payment by the interest earned).
July 7th, 2008 at 5:58 am
We’ve done this for years. Our categories are:
Gifts
Vacations
Life Insurance
Auto Maintenance
Home Repairs
Property Taxes
Homeschooling (we homeschool and books are expensive, once a year)
Water Bill (quarterly)
Savings
It’s an incredible load off to know that when something needs repairs, or when it’s time to pay the yearly life insurance, the money’s there. No stress, no arguing — just pay it. I highly recommend some implementation of this technique for all who are serious about personal finance.
July 7th, 2008 at 5:59 am
We do something similar, and refer to our accounts as sinking funds. We “sink” money into them in equal payments based on how long we have to save and then make a single withdrawal and pay cash. It’s a great system for managing these annual or semi-annual budget “surprises” that happen every year.
July 7th, 2008 at 6:23 am
We roughly do the same thing, but we additionally have a little calendar with the non-monthly bill’s due dates on them. When we built our 6-month buffer fund, we had to figure out what the peak hit could possibly be and make sure we had room for that in our fund (never know what month it will be when we loose a job). With a little spreadsheet you can make sure that your flow is always positive. Once that’s all figured out and we know how much we’ll need to boost it with so that it will always be positive, then it’s just a fixed monthly contribution every month. Putting this in a reasonable interest earning account is the only thing to do. We don’t auto pay out of there yet, but we should and we will.
July 7th, 2008 at 6:30 am
We do the exact same thing but only for car insurance, home insurance and DMV bills. Since we somehow get all of our insurances due at the same time, it eases my mind to know that we’ve already saved for it all.
July 7th, 2008 at 7:00 am
I use high interest online accounts for this exact purpose. I take all my bills (biweekly, monthly, quarterly, annually) and transfer money to my high interest account biweekly when we’re paid.
I don’t yet have ING Direct, so I keep track of that one account by breaking it down in my excel spreadsheet. I update each tab to reflect the new value for that expense.
Our mortgage payments include the property taxes too. I’ve been wanting to save that property tax portion in high interest account and pay it myself since those escrow accounts pay next to nothing like a regular savings account. But since I co-own my house, I can’t just do that without their consent though. And also since my co-owner isn’t near as disciplined with money, I can picture when the tax is due that he won’t have any money saved up.
July 7th, 2008 at 7:12 am
I do about the same thing, but I take it a lot further. I calulated my budget some years back, and adjust the numbers any time a bill changes. When my paycheck comes in, the money I spend on paying my bills goes automatically to one account, from where most of my bills are automatically paid either from the bank’s side or, in the case of bills which change amounts every month, from the utility’s side.
I also automatically transfer the amount of money that I don’t WANT to spend, into a savings account with a somewhat high interest rate, but which I can get money out of easier than ING Direct. This is my money for projects around the house, emergencies, etc. I also have an automatic deduction from ING Direct. This leaves me a checking amount containing about the amount that I usually spend each pay period, plus or minus a few hundred.
Every pay period, if I have additional money in my checking that I didn’t spend, I just toss it into the ‘house’ fund - this is usually $200 or so. If the ‘house’ fund gets above a few thousand and I don’t have it earmarked for any specific project, I take about half of it and put it either into the ING account or use it to pay off part of my mortgage.
It may sound complicated, but the work was all in the planning and setup - I save a lot of money every month and don’t even notice that I’m doing it.
July 7th, 2008 at 7:14 am
What a good term for it! I’ve been calling it by the hopelessly verbose title of “property tax/car insurance/homeowner’s insurance/car registration savings.” The more syllables it has, the more important it must be, eh?
This is absolutely the ONLY way I would be able to pay these annual bills. Problem is, three of the four exorbitant costs continue to rise at a pace faster than my paycheck rises (this year we will get neither merit nor COLA increases). Because our state drops the cost of registration as a car ages, now that my car is 8 years old I can pay that out of cash flow. But the other costs have gone so high that the amount I have to put in “escrow” is starting to strain my budget.
July 7th, 2008 at 7:21 am
I do the same thing except that I use a savings account to get a better interest rate and then transfer the money back to my checking account the pay period the bill will be due.
July 7th, 2008 at 7:28 am
My bank advisor actually suggested that my S.O. and me did this, and we thought it was a wonderful idea.
July 7th, 2008 at 7:34 am
I guess I’m missing the point here.
I budget my expenses based on my expected income for the year. In months where my expenses fall below my income for the month I put the excess funds in a money market account. In months were my expenses exceed my monthly income (usually because I receive a Quarterly, or annual bill) I draw from the money market to cover the deficit. Since my Money Market is also my “emergency savings” I have excess funds to cover, early year non-monthly expenses. I don’t see the need for a separate “escrow”.
I do keep my own escrow for my primary and investment properties to maximize my interest on those balances.
July 7th, 2008 at 7:48 am
I do the same thing, but tend to pop off the top of our “emergency” savings for it. The catch is our savings is two-tiered. I aim for a minimum $3000 for emergency, and then try to keep it topped up to $5000 so that when the big yearly bills come in, there’s enough to float it. Then I just contribute a fixed monthly amount into the emergency fund until it’s back up at the $5000 mark.
July 7th, 2008 at 7:50 am
The “personal escrow” is a good idea. Anything that will help in not spending the whole paycheck is going to work to your benefit.
July 7th, 2008 at 8:07 am
We have the same system in place after we realized that we were budgeting for monthly expenses and didn’t have money for insurance premiums every six months and had to put them on a credit card. After 3 years of a debt management program, we are on track.
July 7th, 2008 at 8:13 am
I’ve do exactly as Charlotte has done. For my list, in addition to property taxes, I included a $ amount per b-day that I plan to spend on loved ones, throughout the year, as well as a $ amount for Christmas and divided it all by 12. To meet the expenses, I learned I needed to start the account with an $800 balance and have payments of $370 per month automatically going into it. It took some time to figure this all out, but worth it. There will be one month, every year, when I’ll have a $50 balance in that account, even with those high monthly continual deposits, but that’s the lowest it’ll ever get, and so I know this account is off-limits and can be used only for its intended purpose, period.
My car repair and house repair funds don’t come from this account, because while they are irregular, they are not fixed amounts. We don’t know in advance what they will be, and so for those inevitabilities, they are taken care of with an emergency fund. I have a balance in there, and then also have $80 going into it automatically monthly because that’ll give me almost $1,000 each year, so a good way to build it painlessly.
July 7th, 2008 at 8:53 am
Great idea of escrow accounts for savings. I don’t think it matters if you use an excrow account. Somehow you have to get yourself in a habit of saving money. Stick to your budget and have separate accounts.
July 7th, 2008 at 9:17 am
I pretty much do this. I call it short term savings, and I budget each detailed category as a line item in a monthly budget. I know how much I have in each “fund” (it is all one account). It is quite detailed, perhaps more than needed, but it gives me clarity on how much I’m really spending each month.
July 7th, 2008 at 9:33 am
We do the exact same thing. I’m glad to see more people do this as well. We track all our bills and spending and have a LOT of categories in it, but we use it for everything that isn’t a fixed monthly bill.
Even our electric bill is paid into it. We pay based on the up-to-now monthly average of our bill and just pay the bill from the account, whatever it is. An unexpected huge bill may make our monthly self-payment go up a few bucks, but that’s about it.
July 7th, 2008 at 9:51 am
we pay health insurance premiums quarterly. each month i stuff away 1/3 of the premium into savings. i keep track of what is destined for where by using an excel spreadsheet.
basically, it turns everything into a fixed monthly expense that’s harder to forget about.
July 7th, 2008 at 10:16 am
We use a short-term savings account for this, but we don’t make every-month deposits. If we’ve met the “minimum” (annual property tax plus annual house/car/umbrella insurance premiums plus the sum of our insurance deductibles) we leave it alone; if not, we add a few hundred to it each month until it’s good.
July 7th, 2008 at 11:18 am
We’ve done this for several years, though we call it our “Bill Pay” account, and it incorporates virtually all of our regular bills. When our direct deposit paychecks come in, they are split and portions are shipped to our billpay, vacation savings, other savings, and spending account. Our spending account is used for day-to-day expenses and the one that controls our spending habits, ie gas, eating out, groceries, movies, other fun stuff.
July 7th, 2008 at 12:45 pm
This is an interesting idea. We are currently living on one income (I am a full-time grad student) and we are expecting a baby, so we do things a bit differently. We have an emergency savings account equal to about one month’s take-home pay. We also save 13% of our net income. Of the money saved, we split off a couple thousand dollars for the baby-related expenses we know are coming (e.g. hospital bills). The rest goes into one pile and every time we have a non-standard expense, be it an airline ticket, car repair or insurance payment, it comes from that pot. We’re definitely still figuring things out, but so far we’ve kept the balance above zero and paid all of our bills on time.
July 7th, 2008 at 1:14 pm
I do a similar thing, but I put the money on our mortgage. In Australia we have the flexibility to pay extra on the mortgage and then redraw the extra funds when we need it. I keep track using MS-Money. The money effectively makes me 9%pa (the mortgage rate), when the best savings accounts are at 7% before tax.
Some mortgages in Aus are linked directly to your savings account so you can have your entire salary deposited and use it as you need. That’s even better because you’re saving interest on the whole amount. My next mortgage will be like that.
Love the site, btw. I found it last week and it is compulsive reading
July 7th, 2008 at 1:16 pm
We add up all the regular expenses we expect, regardless of how often they come due, and maintain that total in the checking account each month. It’s a lower-maintenance variation on the same idea. The idea is that the worst case would be if all of these bills came due at the same time, so we just keep that much money in checking at once, plus one month’s other expenses (groceries, etc.). Even if we spend for every single thing we need in a month at the same time plus all the less frequent regular expenses, we have enough.
We could probably get a little more mileage from out money by putting more into savings, investments, etc. - but it’s worth it to us to save the stress.
July 7th, 2008 at 2:15 pm
My system involves something very close to this as well. As other commenters have also stated, i have set up my bills to be automatic, so i never even worry about it. Automatically withdrawn from my paycheck. Automatically paid.
July 7th, 2008 at 4:20 pm
I don’t own a home or have too many bills to take care of yet, but I had tried to use this similar system for personal hobby savings, vacation, car repairs, random gifts to others, and traditional holidays (i.e. Christmas, Valentine’s) using short-term GICs from ING. I found the money I save racks up over $10,000 that it doesn’t make sense to leave such a big cumulative sum in several “high” interest savings account (3-4%), just so that I can have virtual separation of savings. I mean, what if I reconsidered not to buy that $3000 electronic drum set at the end? What if the car ran fine this year and didn’t need the $5000? I would’ve wasted time/money on interest over a year or more for a better return. I could separate savings in Excel and have one large sum in one higher interest savings, but that’s a lot of work. What do you guys think?
July 7th, 2008 at 4:31 pm
The reason I started this system is because we are following Dave Ramsey’s ZERO budget plan. It also works for me because all our accounts are linked and therefore easy to move money around. Eventually when we have more cash flow, I don’t think we need to make it this complicated. We might do something like Jamie’s #15.
July 7th, 2008 at 4:49 pm
This is really great. Can someone help me with something? I honestly started a budget and the hardest thing is disciplining myself to keep up with it (maintaining it) and just sticking with it.
Please tell me how do you work it on a day to day basis? Do you spend an hour a day? Do you work it on the weekend? How do you update your budget? On paper? Excell? Quicken? What works best for you?
My challenge… very little time.
Thank you anyone for your feedback.
Be well.
http://www.ourstockmarketjourney.blogspot.com/
July 7th, 2008 at 4:58 pm
The reason I started this system is because I am following Dave Ramsey’s 0 budget plan. Eventually when we have more cash flow, I don’t think I need to make it this complicated. I might do something like Jamie’s #15.
July 7th, 2008 at 5:08 pm
Like everyone else here, we do the same thing. We use an Excel spreadsheet to keep track of “subaccounts” inside of the ING for my play money, her play money, house savings, personal escrow, emergency.
At the beginning of each month, $ is moved into each account- we pay regular bills out of the checking account; we need an initial balance of $2000. Any amount above $2000 gets moved into ING and divided up. After the emergency, personal escrow and house savings, money left over is his or hers to spend as they wish.
Alisa, #30 wrote about budgeting- the above is how we solved our budget problem. We tried everything, tracking expenses, setting budgets - all was a waste of time until we rewarded ourselves with discretionary spending cash each month. If we were frugal through the month, we got rewarded and we both shared together. If we overspend, our his/her accounts make up the gap or go negative
Cheers,
Tim
July 7th, 2008 at 7:18 pm
My husband and I also keep a personal escrow account. We plan ours six months at a time. We don’t use our mortgage companies escrow service because they charge extra for it. So we include our homeowners tax, car insurance, and college tuition. When we get ahead on our escrow account from snowflaking or snowballing, then we start on our emergency fund.
I have worked hard since my husband was laid off to find big chunks of ways of saving a lot of money to put into an emergency savings account for the day I hope won’t come: unemployment benefits ending, and no new job. We are three months ahead on our personal escrow account. That means three months of our regular savings will go into an emergency fund.
July 7th, 2008 at 11:58 pm
I follow the same approach to bills that aren’t monthly.
If you get paid fortnightly (every 2 weeks) then the annual amount needs to be divided by twenty six - there are twenty six fortnights in a calendar year.
Like #26 I’m an Australian and another advantage of paying extra money on the mortgage is that these payments reduce the total interest paid over the life of the mortgage and the length of the mortgage is reduced. I’ve been making a very modest extra amount each month since refinancing nearly 2 years ago to my current mortgage and have reduced the term by one month.
I have a household budget - I always treat money for specific bills as “allocations” and always slightly over-allocate so that any increases don’t throw the budget out.
July 8th, 2008 at 1:32 am
I halve my paycheck when it comes in. One half goes to paying bills of all kinds, the other half is for me to spend freely. The half that pays bills is always more than enough, so in future as it grows I’ll use it to start investing.
July 8th, 2008 at 6:18 am
Another more in depth article on this subject was posted on GRS last year:
http://www.getrichslowly.org/blog/2008/01/13/how-to-automate-your-personal-finances/
July 8th, 2008 at 9:17 am
I have a question for those of you with ING savings accounts with multiple sub-accounts.
I finally opened my own ING account. (I received a coupon for a $25 deposit bonus in the mail last week - yay me!)
I want to set up multiple savings accounts for various purposes. I then want to set up automatic transfers. Should I set up a direct deposit from my paycheck to a main savings account on ING, and then have ING automatically split that deposit up to my various sub-accounts? I may end up creating 10 to 20 automatic transfers each month if I use that method. Does that make sense?
July 8th, 2008 at 9:44 am
We’ve done this for years and it does wonders for the finances. It evens things out so every month is at least semi-normal instead of all over the board.
July 8th, 2008 at 11:50 am
I call it my Anti-Emergency Fund (because people usually say they have an “emergency” and that’s just not true!) and have written an article on it at http://www.mendyourmoney.com/create-your-own-anti-emergency-fund/. Without a doubt, this was the most important thing I ever did for myself and I teach all my clients to do the same.
July 9th, 2008 at 9:29 am
i think this is a great idea, i have something like this set up for my rent, except instead of being automatic, i put the money into a savings account each week when i get paid and then use whatever is left for savings and other expenses. it seems to be working great!
July 10th, 2008 at 3:31 pm
I do the same thing but I call it a “Flexible Savings Account”. Basically, it is a short term holding account for those infrequent bills and any other minor unplanned expense that pops up.
July 10th, 2008 at 7:58 pm
Very interesting tips, thanks for sharing — I use an excellent webapp that I recommend highly called BillQ to manage monthly and non-monthly bills. It’s a huge benefit to have one place to track them all, and be able to receive email, and sms reminders of anything upcoming, see a total due for the next 7, 15, 30, year etc… this way you can always be aware of what is coming up… when a new bill comes in just plug it into the system and you’ll be automatically reminded at whatever interval you’ve set standard.
Great system, I have been using it for almost a year now http://www.mybillq.com — Thank God for webapps, before this managing all the bills for my personal and business was a chore now it’s as easy as reviewing an email reminder and checking off boxes — combined with Online Banking of course.
Nathan
July 15th, 2008 at 5:17 pm
You could take this one step further and set up automatic payments on a cash-back credit card. Then, just pay the credit card off each month from your personal escrow account. Voila! Instant discount on your (ir)regular bills.
July 16th, 2008 at 6:45 am
Hi Curtis,
“You could take this one step further and set up automatic payments on a cash-back credit card. Then, just pay the credit card off each month from your personal escrow account. Voila! Instant discount on your (ir)regular bills.”
This is exactly what I do, and what I described earlier this year in an article found here:
http://www.getrichslowly.org/blog/2008/01/13/how-to-automate-your-personal-finances/
Also, much of this information can be found in The Automatic Millionaire, which, though a good read, is nothing more than what J.D. and others have been espousing here at GRS for a couple of years. So, if you’re a regular GRS reader, you can read my article above combined with this one, and a few others here at GRS and you’re done
Seeya,
Paul
July 16th, 2008 at 3:46 pm
I do the opposite approach. I take a larger irregular bill and break it into smaller pieces. The water bill comes quarterly and is about $90. I pay $35 each month. That gives me a bit of a cushion in the summer.
When the City of Portland had a major SNAFU with the water bureau billing several years ago (many people didn’t get water bills for 2+ years). I sent in my estimated amount monthly. At the end, I received a bill showing I had a $65 credit. Plus, because I hadn’t received a bill in 2+ years, I received a credit for my inconvenience. I ended up having 6 months with no water bill to pay.
I use the approach that I tell my money what to do. I don’t allow the utilities/credit card companies/etc. tell me what to do with my money.
Linda
July 31st, 2008 at 7:34 pm
I do exactly this type of thing. I have a secondary savings account at ING Direct that I use exclusively for escrows. I track each of the escrow categories in an Excel spreadsheet that acts as a ledger.
I personally escrow $355 a month:
- auto service, $110
- car 1 property tax, $15
- car 2 property tax, $25
- home property tax, $150 (I don’t use a mortgage company’s escrow service)
- homeowner’s insurance, $34
- HOA dues, $21
I’ve done this for several years, and it works very well for me.