Today’s post is a response to a reader question (love those!) on how to deal with irregular or quarterly billing cycles. Thankfully, I wasn’t stumped and a Personal Escrow Account can handle this problem.
I was reading your Savings Rate as a Budget post and was curious how you handle irregular or quarterly billing. Usually, I don’t have a problem on a month to month basis, but every few months I have a bunch of quarterly bills come due and have to dig myself out or “find a way to make it work.”
That is an excellent question, and I am happy to say we had to solve this exact problem last year. Since we don’t use a budget, if we have a lot of random expenses hit at the same time it makes it difficult to cover all our bills and still live it up. I refuse to carry a balance on our credit card (boooo interest) so we needed to spread the costs out over a longer period of time. This is not a new solution, but we started a Personal Escrow Account to ease the pain.
Unfortunately for a lot of Americans, “finding a way to make it work” means use some form of debt to cover expenses they can’t afford or haven’t planned for. Time to break that cycle.
Using a Personal Escrow Account
An Escrow Account generally refers to money held by a third-party on behalf of transacting parties. The one most people are familiar with is held by your mortgage servicer. They take a part of your mortgage payment every month and hold it to pay property taxes and homeowners insurance on a set interval.
Could you imagine how tough it would be for people to plan for a huge property tax bill every year? Since this solution works so well for costs related to your home, let’s pull it down to other costs that are hard to account for.
What can I use a Personal Escrow Account for?
We use ours to cover 3 expenses, quarterly water bill, housing association dues and our yearly vehicle registration. Other irregular expenses you could use this solution for:
- Vehicle Maintenance (What do you expect to spend every year on maintenance)
- Auto Insurance if you pay every 6 months or yearly
- Taxes/Insurance on a home/property you own (or if your bank doesn’t Escrow these costs)
- Yearly subscriptions (Amazon Prime!)
- Back to school/holiday shopping
The goal is to make your monthly expenses as consistent as possible so you can find a spending groove and start ramping up your savings rate. This solution fits nicely with an automatic transfer investment plan – which I highly recommend.
How to Start a Personal Escrow Account
Instead of utilizing a third party, you will set up and run your Personal Escrow Account yourself. My recommendation is to connect the account directly to your checking account that you use for bills. Ideally, your bank has a savings account without a minimum balance (If it doesn’t consider finding a new bank).
Figure out what expenses you want to plan ahead for.
- Quarterly Water $70 (varies but this was our average last year)
- Quarterly HOA Fees $ 150
- Yearly Vehicle Registration ~$300 (change every year)
Some very simple math and you can figure out how much to transfer every paycheck into your account.
($70 x 4 quarters) + ($150 x 4 quarters) + $300 = $1,180/year
$1,180/ 26 Paychecks = $45.38
All you have to do is setup an auto-transfer on your payday and boom! You can transfer the money as the bills come due without wondering how you are going to pay.
Automatic transfers are your best friend, don’t count on yourself
I still use a credit card to pay any bill that allows it and transfer the amount went the bill comes due.
The first quarter you decide to use a personal escrow account will be the most difficult. You will have to pay the current bills and start planning ahead for the next round. If you are like me, feeling some stress for the first 3 months isn’t bad compared to figuring out how to pay for irregular expenses forever.
No more panicking to come up with the money, or halting automatic investments to pay bills!
Do you use a personal escrow account? Are there any other costs/bills that would make sense to spread across multiple paychecks?