Taking Control of Your Finances: Part V - Expect the Unexpected with a Freedom Account

We’re halfway through the year.  Christmas is a dust cloud on the horizon in your rearview mirror and you’ve moved on to other expenses such as vacation, the kids’ summer camp and making repairs to your ailing deck.  How are you doing with your finances?  Have you been tracking, saving, allocating and giving?  If you’ve been having a difficult time please don’t give up.  The process is on-going and you will constantly be shifting and reorganizing your spending plan based on your season of life and the needs at the time.  

I can hear you now, “But, all of these emergencies keep coming up!  Birthday parties, school pictures, replacing the water pump on the car and taking Mikey to the dentist because he knocked out a tooth jumping on the trampoline.  How am I ever supposed to get ahead?!”   Those unexpected expenses usually sneak up on us.  Otherwise they wouldn’t be so unexpected.  Despite their seemingly devious way, however, these expenses are no more unexpected than a thunderstorm.  You don’t always know exactly when it will arrive but you can count on the fact that there will be one eventually.  Take car repairs, for example.  They happen.  Tires wear out, hoses become brittle, belts break and oil needs to be changed.  Yet, every time we need to take it in for a repair, we stare at that car like a deer in the headlights and then begin to mutter under our breath about life being unfair because we have yet another “emergency” expense.  Do we think that our vehicles are indestructible?  No.  Somewhere in our brains, behind the cobwebs of the important, gathering dust beyond the tyranny of the urgent is a vague notion that vehicles do, indeed, require maintenance.  So, why have we failed to anticipate those repairs?

Our society is fast-paced and, if we allow it to, it will squeeze out any time we had to take stock of our life situation.  We move from day to day, month to month, paycheck to paycheck, filling up every spare minute of our day and spending every spare penny (and then some) before it hits our bank account.  In order to get our feet on solid financial ground we need to learn how to expect the unexpected and that’s where the Freedom Account comes in.

The term Freedom Account was coined by Mary Hunt in her book Debt-Proof Living.  The premise behind the account is to give us freedom from worry about expenses that do not recur on a monthly basis.  The Freedom Account takes care of those irregular, unexpected and intermittent expenses and allows us to anticipate them by having the money ready to go when a “surprise” comes up.  The Freedom Account is not an emergency fund.  Although you might feel like Christmas is an emergency expense when it sneaks up on you…every December, it is not.  Webster’s Dictionary defines an emergency as “an unforeseen combination of circumstances or the resulting state that calls for immediate action; an urgent need for assistance or relief.”  These types of circumstances such as a job loss, a physical disability or a major medical issue would be covered by your Contingency Fund.  A true emergency may never happen but you can count on frequently incurring “irregular, unexpected and intermittent” expenses.  I won’t belabor the point by arguing the semantics of whether or not a car repair is considered an actual emergency.  You get the idea.

It is not difficult to set up a Freedom Account but you will want to follow these instructions well.  Shortcuts wreak all kinds of havoc on your accounting and once you’ve become mired in receipts and math errors you might want to throw in the towel.  This method has proven helpful for countless families on their journey to sound financial management.

1.    Determine your irregular, intermittent or unexpected expenses.

This step can be a little tricky and may take a little bit of guess work.  Starting with your checkbook and credit card statements, make a list of all the non-regular expenses that you have incurred over the last 12 months.  These would be any expenses that did not fit into one of your monthly spending plan categories – quarterly or yearly insurance or property tax payments, Christmas expenses, car repairs, birthdays, etc.  Take a look at the Miscellaneous category on your spending plan and try to move as many non-monthly items out of there and into your Freedom Account.  This will be a tremendous help in tracking your finances in the long wrong.

This list will most likely not be complete.  You will be adjusting it and reworking it for months to come as different circumstances arise.  It doesn’t have to be perfect but you have to start somewhere.  Add up the total of what you spent in each category over the past 12 months.  Then divide the total in each category by 12.  This will tell you how much money you need to be setting aside each month to ensure that each category is properly funded.  For example, if in combing through your old receipts and statements you determine that you spent $936 on car repairs and maintenance last year, the amount you need to set aside every month for car repairs the following year is $78/month.  After you’ve done the math for each category, you will want add up the monthly totals for each category to determine the total amount you will need to set aside each month in your Freedom Account.

2.    Open a second checking account.

Do some research and open a second checking account.  Order checks for your new account and above your name on the checks have them add “Freedom Account”.  It is important to have a second checking account.  The temptation of leaving your Freedom Account money in the regular family account is too great.  “I’ll just borrow a little money this one time.”  Before you know it, you’ve spent your Freedom Account.

 
3.    Authorize automatic deposits.

Either online or at the time you open the account, request automatic deposits from your regular account to your Freedom Account every month on a specific day (ideally, this would be pay day).  It is very important that you keep track of your transfer day because the bank will never forget to make the transfer and you do not want to overdraft on your regular account.

A classic three-ring binder will work just fine.  Fill it with paper and make a separate page for each sub-account in your Freedom Account.  For example, you will have a page for Auto Maintenance, one for Vacation, one for Christmas, etc (see printable account page).  Fill in the title of the account and how much the monthly deposit will be.  While the bank will make the lump sum deposit into your Freedom Account, you will be responsible for dividing up that amount into your various sub-accounts.  If you prefer an online method, Debt Proof Living offers a Freedom Account Manager with its annual membership. www.debtproofliving.com.  Be sure to reconcile your Freedom Account notebook with the bank statement for your Freedom Account.  Banks can make mistakes and so can you.  Don't be caught off-guard by a forgotten check.

Okay, you’ve got your Freedom Account set up.  Let’s take a look at how to track it:

Marley begins her Freedom Account at the beginning of October.  Her total monthly deposit for her Freedom Account is $723.  She opens her notebook and divides the money between her various accounts, including $78 to her Auto Maintenance account.  The next month runs smoothly and she makes another deposit in November.  In mid-November she needs an oil change.  No problem for Marley!  She’s got the money just waiting for a repair.  She writes out a check to Rob for $50 to cover the oil change and deducts that from her total balance.  The next month she makes her regularly scheduled deposit but mid-month a hose breaks on her car and she has to have it repaired.  Again, no worries for Marley.  She’s cool as a cucumber, despite the fact that Christmas is only 10 days away, because she’s got more than enough to cover the expense.  And so it goes…  With each account Marley makes her deposits and deducts the amount she uses.  As her car gets older Marley may want to re-allocate funds on her Freedom Account to allow for more money available for the inevitable repairs on an older vehicle.  Her Freedom Account will occasionally need to be adjusted but at least Marley has a system to manage those non-monthly expenses.

That ultimate goal of the Freedom Account is to have a full year’s expenses funded in advance so that you only need to fund the account when you’ve spent money from it.   However, it might be difficult in the beginning to get those accounts funded before you need them.  Please do not consider a Freedom Account to be a luxury for those with disposable income.  These expenses will visit themselves upon you just as they do Bill Gates.  It is your duty to your family to make sure they are managed in a financially responsible way that does not require that you run to your dubious plastic companions.  If it is possible, try to first jumpstart the accounts that you know will be coming due sooner rather than later.  If your life insurance payments are due in three months then you may want to double up on payments to that particular sub-account so that you have the total amount available when it is due.  A small windfall such as a tax refund or a monetary gift from a family member would be an excellent way to get your Freedom Account started on the road to success.

Remember, these expenses are not optional and preparing for them shouldn’t be either.  It will take some perseverance and a little time but you can get this system to work for you.  For more detailed information on the Freedom Account or any of the money management techniques I’ve discussed in previous articles, pick up a copy of Mary Hunt’s book Debt Proof Living or sign up for a membership at her website www.debtproofliving.com.  Get on the road to financial freedom!

To view previous articles in our Taking Control of Your Finances series check out the Finance Mom section of our website.

Kim is the wife of one rockin' Worship Pastor and full-time mom to four crazy and beautiful kids. Toss in a part-time job, housework, a blog (http://www.fishbowlliving.com) and what passes for a social life these days and she’s still wondering how she fits 32 hours into a 24 hour day.