Everyday Cheapskate: You Need a Freedom Account
If I asked you to deduct your monthly expenses from your monthly income, I have a feeling you'd look pretty good on paper. The mystery for many people is why they can't get through a month without using a credit card to cover unexpected expenses, such as a prescription for a sick child, a quarterly insurance premium or a wedding shower gift.
Your predictable, fixed monthly bills are not the problem. Somehow, the rent and utilities get paid, and the family gets fed. The problem is the accumulation of nonmonthly expenses. Some are easily predictable; others are not.
Here's the problem: Every day, we are wearing out our cars, the kids are growing out of their shoes, we're using up our prepaid insurance, and we're inching closer to the holidays and vacation. But we manage our money as if none of those things is ever going to happen. And when they do, we collapse into a pitiful heap and bemoan the fact that, once again, we've been broadsided by an emergency -- another financial crisis!
The solution for this problem is to establish what I call a "freedom account" that forces you to anticipate unexpected, irregular and intermittent expenses and finance your own emergencies.
STEP NO. 1: DETERMINE IRREGULAR EXPENSES
Using your check registers for the past 12 months, your credit card statements, your tax return or, if all else fails, your memory, make a list of expenses you've had over the last year that you did not pay on a monthly basis. It might be insurance, property taxes, Little League fees, gifts, clothing, vacation, Christmas, car repairs, sports, hobbies, etc.
Come up with an annual figure (estimate if you don't know), and then divide by 12 so you arrive at a figure that represents one-twelfth of the total annual expense.
Auto maintenance: $900/12 = $75
Auto insurance: $540/12 = $45