Don’t Let Irregular Expenses Wreck Your Budget (or Drain Your Emergency Fund)

Great Article! I have an EF and several targeted funds ranging from House Taxes and Insurance, pet care, money for workshops related to my hobby and a vacation fund. I started these in April of this year and have automatically sent 12-20 dollars to each targeted fund each week since then.
One thing though, I didn’t wait till I had the regular Emergency Fund up to it’s target goal. I just plunged in and started funding the targeted accounts along with the Emergency Fund. I didn’t want to wait forever to start the target accounts, b/c things break or opportunities arise regardless if your EF fund is big or small.

M and I had this discussion a LONG time ago and I was trying to talk her into this targeted account system. Her response was a blank stare and this: “We’re out $300 no matter how you cut it. What’s the point?” She’s got a point, but I like the idea of trickling money into specific accounts each month and then psychologically you feel like these types of things are already “paid for.”

But the more I thought about it, she’s right: the math don’t lie.

I have two savings accounts, one for what I call “liquid savings,” and the other is “DO NOT TOUCH EVER!!!” I have money deposited automatically out of every paycheck to both of them (last I checked, it was like, 15% of my net paycheck, between the two accounts).

I take things like vacation cash, clothing purchases, unexpected veterinarian bills, car repair, etc., out of the liquid savings. That’s where I stash money for planned future buys, too.

The Do Not Touch savings I let accumulate until it hits a certain amount, then I *have* been buying a CD with it. However, I already have two CDs that amount to my six-month emergency fund, so next time I’m thinking of looking into some other kind of investment – still secure but maybe pay a little better interest. If I don’t have to use any of the emergency funds by the time I retire, they’ll be consolidated and kept in case there’s a major house thing – AC repair, roof repair, etc. If I sell the house, then I’ll have that cash to move with, or use for other expenses (I doubt I’ll buy another house if I sell this one, for a variety of reasons).

I have several targeted funds, but only 2 of them are really emergency funds. One is for car repairs ($25/paycheck since my car is less than a year old) and our large Emergency Fund (which is fully funded, but I still put $25/paycheck into it).

I also have targeted savings accounts for travel (that’s been $200/month, but I just paid for most of the big trip I’ve been saving for, so that’s going to change) and I recently emptied the savings account that I built up for my new car purchase. The travel fund will be almost emptied in March when I take a trip to Ireland.

Nice article. A couple q’s, though:
- currently we send all “targeted funds” to an interest-bearing checking account that we don’t touch. Excel keeps track of what’s where for us. Redneck Bank makes better interest than ING (by a long shot! something upwards of 3%). Is there anything with comparable interest but also with subaccounts?
- how do I “automate” my funds deposited into a number of different sub-accounts? Do I need to make several automatic deposits from my checking ($26 here, $35 there,…)? Or can ING (or whomever) divide the money up as I request automatically?

Very timely post for me as I’ve made several unexpected repairs myself this month to my 20 year old truck and I’ll be making some more shortly as it took me 15 minutes to start it this morning!

I keep a sub-account labeled “vroom vroom” (I like to give them silly names to keep it fun) which was originally planned as a car down payment fund.

However, I’ve pretty much decided that I don’t want to own a car anymore, so this fund is now my maintenance fund until I can iron out all the details of going car-less.

Of course, I could still afford to make the fixes without using the fund, but it would wreck my monthly budget which has some psychological ties that I enjoy preserving.

To each his own, I suppose, but I’m definitely a fan of the sub-accounts.

I like this concept and have been playing around with the idea myself…I think, though, multiple accounts would be demotivating to me at this point (I’d only be able to put a small amount in each, and they’d build up very slowly). I think the two separate accounts mentioned in the comments is a great idea–general savings and emergency fund.

On the other hand, I might feel guilty about tapping the “general savings” to go on vacation, knowing that I wouldn’t have it there anymore for car maintenance…lots to think about.

I have two accounts. One is an emergency account that is only for a major emergency (job loss or major illness/disability), and the second is for larger occasional expenses (insurance, pet care, etc.) and also unexpected expenses that I don’t consider to be major emergencies (like having to repair my computer).

I agree with those who said that there is a psychological benefit to having sub-accounts. On the flip side, if you are dipping into your emergency account for things like car or home repairs, then it may not feel like a true emergency account, which may make it easier to dip into it for other non-emergencies–like the boots for sale at the mall that you just HAVE to have! I disagree with those who have said car repairs are an emergency expense. If you own a car that’s a few years old and is not under warranty, it is inevitable that it will need repairs, so it’s best to plan ahead for this.

Great points. I think it a really important part is it to automate it. If we don’t make it automatic, it is way to easy to let it slip by without getting done.

We have two accounts for emergencies: one for property taxes because we recently paid off our house (hooray!) and one for car repairs. My husband is reimbursed for mileage, so we began putting that extra check into an account for fuel and maintenance. We also keep a long term liquid savings account with nine months of living expenses. As money accumulates, we shift it into investment accounts.

Nice article. To combat this particular problem I’ve implemented a couple savings accounts that I never had before. As JD has talked about ING Direct being so great for this, it has made my life so much easier.

I have 2 accounts for these kind of things:

1 – Emergency Savings (If its a really big issue)
2- Non-monthly expenses (Well if its something unexpected ,yearly fees, etc)

I set it up that each month money gets dumped into those two accounts. When an emergency or unplanned expense comes, its there. It wont throw off my entire budget and ruin my goals (or my life.. well not too much).

James

Targeted emergency funds and savings accounts have really been about peace of mind for me. My fiance and I are planning a wedding and the idea of having targeted funds for a banquet hall, DJ, florist, etc. has really allowed me to know that we have enough money for such an undertaking. As long as targeted EF’s are in a safe place such a an FDIC insured savings account and not stuck in something like a CD I feel they make total sense.

I have all of the money in one account, but keep track of these sub-accounts on Excel. It makes a big difference for my psychologically to see that I have money set aside. And when I have to use it, my budget is not wrecked for the month. I have sub-accounts for the car, the kid’s medical, and kid activities (going to the museum or whatever).

I also use my spreadsheet to roll over extra money for utilities. For example, I plan on $170 for electric, but rarely go that high. The extra money rolls over to the next month. By December, I have plenty saved to take care of the sudden jump when I have to run the heat (I live in Florida).

More important than the two reasons given (IMO) is that by separating out the accounts, you aren’t able to do shady math, and count the money for yourself twice. If you need 6 months worth of regular expenses saved, and you also need money to repair your car, then you can’t take money from your emergency account to pay for your car. The emergency fund trap is that you take your five target funds that you should be saving for (car repair, next car, house repair, tuition payment, gift fund, etc) and only and save enough for only one or two, because they are all in the same account. There can be no mistake if you’re supposed to have $1200 in your car repair fund, and you only have $800.

In fact, I think counting money more than once is a phenomenon that happens elsewhere too. When people get a $100 bonus, they often find themselves planning on saving some of it, but still go out to dinner, buy a new mouse for their computer, get a car wash, and soon enough there’s nothing left to save.

I think what works for you depends on how you budget. If you are on a “pay yourself first” budget where you spend whatever is left after savings then this type of subaccount system might not be for you, or perhaps you would only set aside $ for larger expenses.

But for those that budget every dollar it makes a lot of sense. If I want a new pair of boots it has to come from one of my budget categories. And if I have a huge pile of money for all of my savings how do I know how much of it is for clothes, gifts, car repair, etc?

I used to do the single savings account, but I found after about a year I couldn’t keep track of how much money was in there for any one thing. Nor did I know if what I had been setting aside for a category was the right amount.

By splitting it up in an Excel sheet like others here, I found myself spending completely differently. And I am much happier with my purchases and never worry about if I just spent Xmas money on boots, or car repair money on Xmas gifts. The spreadsheet also allows me to go back and review how close my budget guess-timates were to reality.

I have just one Money Market account, but in my personal budgeting I have it divided into three parts:1) Known irregular expenses (taxes, insurance, deductibles, etc.), 2) True emergency, not to be touched other wise, and 3) the “Fun Fund” (for big purchases or vacations). I have a “cap” for each one, so that my monthly deposits go into Category 1 until that reaches its cap, then is split between 2&3 until one or the other reaches its cap, then, if all three reach their caps, I raise all the caps a little bit.

I know, it is really all mind games, but it works for me.

I agree with a few people here about keeping separate accounts. Yes, they build slowly, and sometimes hit zero when you use that money for its intended purpose. But it keeps me from doing ‘shady math’ (per #27), and that’s exactly why I keep them all separate. We budget by the week (ex. rent calculated weekly, paid monthly), we get paid by the week, and we save by the week. It all makes so much sense, because we all understand that there aren’t 48 weeks in a year. I have a large EF savings account that is at a completely separate bank (chasing the highest rates). I’ve never touched that account, nor do I really intend to. I also keep a ‘local EF’ at my local bank where my primary checking account is at. That’s just in case I need something in cash that moment. It would take a couple days to get to the larger EF. For targeted accounts, I have several that we contribute to each week, right after our paycheck credits to the checking account. Vacations: we plan the trip each year with this in mind, and transfer most of it into the checking account when we travel and just have a blast not worrying (within reason) about what we’re spending. Offerings: We give regularly also, but also choose to give large missions offerings at our church twice a year, that we plan ahead for. Automotive: This account covers building the funds to buy with cash when the time comes, and is also used to repairs and most maintenance items. Gifts: We hate it when two family birthdays (or whatever) line up on the same week and mess our budget up, so we save for this. It also accumulated enough to handle Christmas time also. Wife: My wife tends to go shopping for clothes only a few times a year, and so we save for that so as to not throw the weekly budget out of whack. Since we’re renting now, we don’t save for things like repairs and taxes, but we are saving for buying a house in a separate account. I also opened a checking account at the same bank I have my targeted accounts at. That allows me quick access to the money there, and the ability to write a check with those funds without going through our normal checking account which is now only used for daily items and to pay off the credit cards before any balance is due (I pay them off weekly).

“We have around 10 “sub-account” or sinking funds that we fund on an annual basis. These range from car repairs to vacation to home decoration. We love the feeling of security these provide, and it’s great to not feel guilty buying a few new pictures for the house because you already budgeted for it and funded those expenses ahead of time.

We don’t physically create sub-accounts to accomplish this. All of the money is in one account (well several, but you know what I mean) and we keep track of each category in an Excel sheet that’s linked to our monthly budget.

Nerdy perhaps, but it works great for our family!”

This is almost exactly what we do. 15 sinking funds, but they’re all in an ING account and tracked in Excel. I don’t feel guilty buying photos now and then, I’ve got money for car repairs, doctors, etc. We’re currently working on our EF but I feel better keeping it closer to 3 mo than 6 mo because I know there’s a fair chunk of money in ING as sinking funds that we could raid if we were super-desperate. We began these as we were paying off our debt rather than waiting until we had an EF and paid everything off. It probably took longer to pay things because of that, but we were more prepared when sudden bills came up.

Hi. I think some confusion arises because April calls these “targeted emergency funds” but it’s not actually emergencies she’s talking about.
When DH and I were thinking about whether he’s ready to retire, I looked at several years of expenses, and could easily see that we used our incoming funds in X amount for regular monthly expenses and Y amount was spent every year on irregular expenses — which weren’t emergencies, just irregular.
Some of the categories on which that money is spent will change over time, but I suspect that the amount will stay fairly even — I think people may have a “set point” for spending the way that nutritionists tell us we have a “set point” for our weight, the place at which the body feels comfortable….

We do this a bit differently. We have one account and keep an excel sheet with each irregular expense broken out by estimated annual amount, estimated monthly amount, and “bi-weekly contribution” because we are paid bi-weekly. I sum up the bi-weekly column and have that amount taken from my paycheck and deposited into the account. I like this method because it allows me the flexibility to change things on the fly. I found that I spend more on vet and grooming expenses than I anticipated, so I increased that category. Budget looking tighter than usual? Lower the annual amount for Christmas gift and boom, the bi-weekly amount it automatically recalculated.

This also allows me to see more precisely where my money is going. If I had known Vet & Grooming expenses would average out to be $88 a month I wouldn’t have adopted long hair, high maintenance dogs.

Tyler @34 – Keeping a big cushion in your checking account for these sorts of irregular expenses is great IF you aren’t tempted to spend the balance on random wants. It’s exactly what I did when I was single and it worked great. However, hubby is the spender in the relationship, and he is likely to spend extra money at the end of the pay period (iTunes is a big one). But he wouldn’t use the money in the “car replacement fund” to buy a want on a whim. For him and probably many people on this board, sub-accounts are a phsycological barrier to keep you from spending extra cash, when you should be saving. Like JD says, do what works for you.

ChrisD @9 – This is the problem I have. I think if you don’t use ING Direct or another online bank that offers this, you can do the same thing with a piece of paper or an excel sheet. Just write down how much in your savings account is set aside for each goal, and then update it as you take money out or put money in. Every time my bank does a satisfaction survey I always ask them to make sub-accounts!

I have a different system that works for me (because I don’t like spending anyways). I have my rewards checking which has a floor amount (everything below is emergency, and I get an email when I’m less than that). On top of that is everything else, this months expenses and more, the space between the floor and the current amount covers everything. The floor moves up along a schedule(every paycheck) so I have to keep ahead of it. I don’t recommend this strategy if money is a willpower issue, for me the fear of touching that floor is enough to keep me from splurging on a new TV. Also the floor sometimes holds still because I’ve planned in a “reward” for reaching a point. The rewards checking gives me 4.01% so there is no way I’m moving that money into separate accounts. My End Goal for the floor is to reach the ceiling for that rate, 20K.
I don’t separate because there are two categories things you can plan for and things you can’t. The money below my floor is only for things I can’t. I have to eat through all my “fun” money before I can touch that. There is no sense in still paying for a cruise because “its a different account” when you just spend the same amount to replace your now dead car. Needs first then wants.

I like the comfort of having several sub accounts, although I’m trying to limit them as it was getting a bit ridiculous (and time-consuming) to manage them. So now I have only a couple of actual accounts and I use YNAB to earmark different amounts within the accounts to different spending categories (household, cat, holidays, car registration etc.). YNAB (www.ynab.com) is essentially a virtual envelope system so you can have all the sub accounts you need. It works for me, as long as I don’t let myself get too specific! Yes, I am my own worst enemy!

I very recently revised my budget and got rid of most of my existing subaccounts. I realized that, for me, having one lump account of ‘irregular expenses’ and then my emergency fund, is what works best for me, psychologically. However, I think it was important for me to clearly define what constituted an irregular expense, and would allow me to access those funds. (For me it’s things like eyecare, car maintenance, my AAA membership, car taxes, etc.) I know I could get more granular with my accounts (and have in the past), but for me at this point in my life it’s just not that important.