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Prepare for Irregular Expenses with a Freedom Account
Posted by Adam Pash at 7:35 AM on May 13, 2008
In addition to your traditional checking, savings, and emergency accounts, financial weblog Get Rich Slowly suggests setting up another money bucket for irregular or unexpected expenses. Sock away money in a "Freedom Account" for expenses like clothes, vacations, and car maintenance. Setting this money apart from your regular monthly bills ensures you keep a tighter rein on what you spend on irregular expenses, and it also helps you set savings goals for larger purchases. Whether or not you're already doing something along these lines, let's hear how you track and manage your irregular expenses in the comments.
Comments (AU Comments · US Comments)
F3ngles
Posted May 13, 2008 6:40 PM
This may be slightly off topic, but I personally have a rule which I call the "Nevada Gaming Commissions rule" - from an idea I developed off Oceans 11. It basically says that I must have enough money invested in a stable account (a high-interest online bank account in my case)to cover the credit limit of my credit card. For example, if the sum of my credit limit (for all my credit cards) is $5000, I must have $5000 in that account at all times. No excuses. If my credit limit get's bumped to $10,000, then I start putting money into this account until this amount is reached. Meaning, no buying of unnecessary items until I get that amount save. After that, I'm free to purchase whatever I want.
The logic behind this is, *if* there is an emergency and I need to max out my credit card, I can rest assured knowing that I will not have any issues in paying it all off tomorrow. In a worst case scenario, I can max out my credit card AND use some of the available funds if necessary (just make sure you have enough to pay off the minimum in your next bill). But that is really the worst worst case scenario.
arsenik
Posted 5:06 AM 13/5/08
This is great and all, but really, the Dave Ramsey method (read more at [www.daveramseyforums.com]) is all anyone needs. Using his zero based budget you can make a "blow money" amount each month. I'm sure this freedom stuff works, but the Dave Ramsey method is easier to follow and just plain works.
arsenik
conigs
Posted 5:36 AM 13/5/08
My method is probably overkill as well, but I try to keep one month's budget in checking and two months' budget in a linked savings account. At the end of each month, I transfer anything above my budget in my checking to a high-interest savings.
This creates an extra account to keep overflow money for unexpected purchases or splurges. The two months' budget in linked savings does two things: gives me a buffer if I happen to overdraw my checking account one month (hasn't happened yet) and makes sure I have enough money to live off of should something happen where I can't work for a little while.
conigs
Norcross
Posted 5:22 AM 13/5/08
While that's all well and good, if you're good enough to budget that well, then adding another account for the irregular stuff seems to be overkill. After all, isn't that was savings is for to begin with?
Norcross
OX4
Posted 5:55 AM 13/5/08
This is a neat idea. Irregular expenses are the hardest to budget for, at least for me. It certainly helps to keep the money segregated in another account. However, the biggest problem is how to get started saving for those irregular expenses...it definitely takes some start-up time.
OX4
Troy F.
Posted 6:33 AM 13/5/08
Seems like overkill...this is what my "Emergency" account is for. Doesn't seem like I need another.
Troy F.
Cameron Fredman
Posted 7:20 AM 13/5/08
I'm concerned that the phrase "freedom account" is too unpatriotic. Can we call it American Patriotism for Justice in Shopping?
Cameron Fredman
medialush
Posted 7:20 AM 13/5/08
I've had an account like this for years. I call it my 'splurge' account, and it's for all those fun extras like clothes, new electronics, vacations, etc.
I wouldn't include something like car maintenance into that though. That should be budgeted every month as far as I'm concerned, even if you don't use it. That's a regular expense, not an irregular one.
medialush
Leisureguy
Posted 9:20 AM 13/5/08
A while back I published a (free) Excel workbook to help compute the amount needed for the "Freedom Account" (though I don't call it that). So far more than 16,000 downloads. You can download a copy here. Again: it's free.
Leisureguy
saffyre9
Posted 10:41 PM 13/5/08
I do something like that already with several ING accounts; I have separate ones set up for car maintenance, vet bills, gifts, etc. I have a set amount transfered into each account automagically each month, and when I need to use that money it's sitting there waiting for me.
saffyre9
frankz00
Posted 10:24 AM 15/5/08
Been doing this for years. It is a great idea. I just call them "bill pay" and "spending" accounts. With my "bill pay" I have ZERO access to ATM and I don't carry my checkbook. All of my bills get paid through PayTrust and I am basically always covered. If I run low in spending, too bad. I just wait until I replenish it.
frankz00