Wallet Archives - Home and Handbag

How to avoid overdraft fees

It happens to the best of us – a charge clears earlier than we thought while payday is a couple of days away and bam! – you get hit with an overdraft fee. If you’re trying to work on your finances this can be super discouraging. Earlier this week our checking account dipped below our preferred minimum and we could have gotten hit with a fee if one more charged cleared. Eek! But take heart! There are ways to avoid getting hit with these annoying fees.

Set up alerts to notify you when your balance dips

This is the main tool I use to make sure I have enough in my account to cover the bills. I’ve set up an alert on my checking account to let me know when my checking account goes below a certain amount. For me I’ve set the alert at about the equivalent of a month’s rent, but you can choose another amount such as another large bill.

Spread out your bills and keep track of withdrawal dates

Another way to avoid fees is to spread out your payments across the month so that a lot of money isn’t being withdrawn at the same time. In the same vein, keep track of your billing dates so you aren’t surprised at the drop of your bank account. For example, I use Google calendar to keep track of the transfer dates and amounts for my sinking funds so I’m aware of upcoming deductions.

Keep a cushion in your checking account

Padding your checking account with extra monies can also protect against charges sneaking up on you. How to you create a cushion? First, you have to make sure that you’re not spending more than you bring in. Look at the low hanging fruit like coffee and lunches out. Aim to have at least an extra $100 cushion in your checking account. The key is pretend that the money isn’t even there so you aren’t tempted to spend it.

Link a savings account to your checking for quick transfers

Assuming you followed suggestion #1, once you noticed that your balance has dipped below the desired minimum you can quickly transfer money from your savings account, thereby creating your own overdraft protection. This tip works best if your savings account is with the same bank. For example if your checking account is with Bank of America but your savings account is with Ally it might take a couple of business days to transfer your money. Having a saving account at the same bank allows you to do an instant transfer.

When in doubt, ask for mercy

Sometimes despite our best efforts we still manage to get hit with a fee. If this is your first offense, call your bank right away and ask if the fee can be waived. Most financial institutions are willing to waive the fee if this is your first infraction or your last offense was more than 12 months ago.

Do you have other tricks to avoid overdraft fees? Leave a comment below.

How to avoid a surprise tax bill next year

Now that April 15^th has come and gone and some of the pain has passed, I can use my suffering to help you, dear friend, avoid a big tax bill next year. We owed a lot more than we usually did. As expected, we went through the five stages of grief:

1. Denial – We can’t possible owe this much. Run the numbers again!

2. Anger – Me: I told you to check your withholding! Hubby: You didn’t tell me that!

3. Bargaining – Me: Do we have to pay it all now?

4. Depression – Us: Why do we owe this much? I need chocolate!

5. Acceptance – It’s the evening of the 15^th! Let’s just do it so we don’t get hit with a fine.

I had forgot the cardinal rule of tax planning: always check your withholding. I had learned this trick years ago, but over time I had forgotten how important it was especially with the new tax law changes. So how do you check and change your withholding? Glad you asked:

Step 1: Get the pay stubs

You’ll need a copy of your (and if married and you file jointly, your spouse’s) most recent paystub. If you get paid through automatic deductions log on to your company’s HR system to print a copy. Mourn briefly over the difference between your gross and net income. Then remember Justice Oliver Wendell Holmes, Jr.‘s quote: “Taxes are the price we pay for a civilized society.”

Step 2: Use the IRS’ withholding calculator

Go to www.irs.gov and search for “withholding calculator.” It should be the first link. Scroll down a bit until you see a button that says “Withholding Calculator.” Complete each page of the calculator based on your circumstances, plugging in numbers as needed from your paystub.

Let’s work through an example. Let’s say David and Abby Jones are checking their withholding. They file jointly.

Next they’ll need to enter in their current withholding, if and how many dependents they have and if they have any deductions like student loan interest or…

On the next screen the Joneses will enter the gross income they expect to receive. If they contribute to a non-Roth, tax deferred retirement plan like a 401k, 403b, or 457, they would also enter the annual contribution they plan on making here as well.

This screen is where the pay stubs will come in handy. David and Abby will need to enter how much federal tax has been taken out so far this year and in their last pay check.

The next page is deductions. Unless amount of deductions such as gifts to charity (including tithes) and medical expenses exceed the standard deduction, I suggest skipping this section and press Continue.

And that’s it. The next page are the results. Based on my completely fake numbers, the Joneses will own Uncle Sam about $2,800 … unless they change their withholding. The IRS will suggest the edits you’ll need to make to your W4 to ensure that you won’t owe come next April 15^th.

Step 3: Update your W4

Now, you probably haven’t seen this form since you started your job, but it’s important to use the information from the Withholding Calculator to update your W4 as soon as possible so that the changes are made in your paycheck as soon as possible. For many companies you can do this electronically however if you need to submit a paper copy, here is it. Both David and Abby would change their withholding to 0 on Line 5. On line 6 David will request an additional $43 to be withheld from his paycheck; Abby will request an extra $37.

Now, what to do with your refund? How about putting it in an sinking fund?

What about you? Do you regularly check and update your withholding? Leave a comment below.

Automating your finances

We are fortunate to live in a time when have so much technology to make our lives easier. While there are certainly downsides (we’ve all seen Terminator 2: Judgement Day), I’m sure nearly all of us have used an app or website to save time such as buying groceries or movie tickets online. However I still see some resistant to using technology for finances. Let’s address some the ways we can use technology to improve our financial outlook and the concerns we can have about using it.

Use online banks

Full disclosure: our main checking account is with a traditional brick and mortar bank. I do appreciate the convenience of having an ATM practically on every corner. However my savings and sinking fund accounts are with an online bank.

But is it safe? Online banks are also FDIC insured just like your typical brick and mortar. And since it takes 1-2 business days to transfer money from them to your regular checking account, online banks provide a nice buffer between you and your spending impulses. Finally, many online banks offer higher interest rates compared to many brick and mortar banks.

Get credit card alerts

You can get a text message each time you use your credit card. This has been so helpful in keeping track of my purchases and updating my budget. It can also be used to catch fraud if your card is ever used to make an unauthorized purchase. Log on to your account and look for large purchase alert. Next set it for the minimum amount, usually between $1-$10. As long as you have unlimited text messaging, there’s little downside to setting up alerts.

Automate bill paying

How many times have you been slapped with a late fee because you forgot to pay before the due date? Yep, been there too. However, by setting up an automatic payment will ensure that your bills will be paid on time.

But I’m afraid that I won’t have enough money in my account when the Visa/Cable/Rent man cometh. This is a valid fear; if you don’t have enough in your account when the deduction is made you could be hit with an overdraft fee. But there are a couple ways to assuage this fear.

Have a buffer in your checking account (I.e. create your own overdraft protection)

Think about your largest month expense. For most of us this is our rent or mortage payment. This amount can serve as the bare minimum that should be in your checking account to ensure that you can pay your bills without bouncing any checks. Will it take time to work up that that amount? Absolutely. But even a couple of hundred dollars can give you some needed cushion.

2. Spread out due dates

It can be anxiety inducing if everything is due at the same time each month. However changing some of your due dates can help make sure you’re not having too much withdrawn at once. Just call up your card and utility companies and see if you can make the switcheroo. Most are happy to comply.

Automate saving

The less you have to think about it, the more likely you will do it. Automating savings is also a great way to ensure that you’ll actually do it. Sometimes we can think “I’ll pay my bills then save whatever’s left.” However, let’s be honest with ourselves (this is a safe space). If it’s in our account, we’re probably going to spend not save it. But if we schedule it, it will happen. Automating our saving prioritizes ourselves and our goals.

Automate your giving

If you tithe or regularly give to a charity, check to see if automatic deductions are possible. Many churches have set up online giving. DH and I have been doing this for the past few years and it has been a godsend (pun intended). No more having to run back home to get a check or looking to get a check and realize that you’re out of checks. Not that I would know anything about that.

Do you use technology in others ways to manage your finances? Leave a comment below.

Reviewing Your Year-End Summary (or how to stop lying to yourself about your spending habits)

January is a time of newness and restart. One year gone, another one has begun. But now that the champagne has gone flat, it’s time to get back to business.

Around mid-January, credit card companies put out your Year-End summary – a synopsis of all your charges over the last twelve months. This document doesn’t get the fanfare it should, but it can be an important tool in managing your financial health. It lays out in simple black and white how much you spent, often by category: groceries, travel, entertainment, transportation, fees. Some may also summarize by month so you can see how your spending varied across the year.

Now, depending on how you’ve been using your credit cards, this may be a nice summation of your good discipline and spending habits. If so, good job, have a cookie. However, for others it might be a needed wake up call to get your coins under control. But it’s OK. We’ll get through this together.

Step 1: Get your summary

Log on to your credit card’s website. The summary is usually under Statement section for the prior year. Print. Rinse and repeat for any additional cards.

Step 2: Review

First, look at the summary by category. Are any categories higher than expected? In particular, examine the unessential categories: dining, entertainment, and the nebulous merchandise. Can you remember most of those purchases? Were they really meaningful?

Step 3: Compare to your budget

Now look at your budget (you have one of those, right?). Do you need to revise your budget based on your spending? For example, if you spent more in the travel category than you initially budgeted for and remember each and every trip, perhaps you need to up your allocation in that category.

Year-End summaries can be great tools to review your spending and make changes in your budget for the upcoming year. How about you? Are there other ways you use the year-end summary to improve your finances? Leave a comment below.

Merry Belated Christmas! Now Start Planning for the Next One

Happy 2019! I hope everyone had a great holiday season. My holidays were filled with family, traditions, and most importantly… collard greens. But now that January has rolled around, some of you may be opening up credit card statements with dread wondering how you spend so much when your heart was set on having a simple Christmas. However, the best time for planning for the Christmas season is right now. Here are a few ideas to help you save money so that the season of giving doesn’t completely tap your pockets.

Start a Christmas savings account. Like yesterday.

Spoiler alert: Christmas is happening on December 25, 2019. Same as the last 542 years. However, how often are our budgets caught off guard as if we didn’t know that Christmas was coming? That’s why you need a Christmas sinking fund, where you save a little bit each month until the holidays. As I’ve mentioned before, you can set up an online savings account to put some separation between funds earmarked for Christmas and the rest of your spending.

Look at what you spent this past Christmas. Include all presents, the tree, decorations, and extra food you purchased for Christmas dinner. Ask yourself: do I want to spend the same amount next Christmas? Do I need to increase my budget to account for a new in-law or baby due this year? Or do I need to cut it back because everybody is grown and can buy their own gift? Take that number and divide by 12. For example, if you want to spend $500 for Christmas, you need to set aside $42 per month. Next, set up an automatic deduction to your newly created savings account. When December rolls around, you’ll be ready to shop with the freedom of knowing how much you can spend without incurring debt.

Now for some, you might not be able to carve out $42 per month for the Christmas fund. You need to make some choices. Are their people you should cut from your list? (See next point) Was this year’s Christmas too extravagant and you really should scale it back this year? Are there other things that you can cut from your budget so that you can set aside money for Christmas? Jesus does not want you to go into debt for his birthday.

Make a list of everyone you’d like to give a gift to. Then edit.

You love everyone. You enjoy seeing the eyes light up as your friend/family member/hairstylist opens up your thoughtfully chosen gift. But if there are tears — and not the joyfully kind — come January, you need to rethink how many gifts you’re handing out.

As you reflect on 2018’s Nice List, really reflect on who received a gift and why. Was there a sense of obligation or guilt in your purchases? Were there a lot of acquaintances on your list? If so, you may need to weed out your list so that you focus on encouraging the people that provide you the most meaning in your life.

Propose alternative gift giving

Some of us have very large families. For example, my husband’s father is one of seven and the first time I went to his extended family’s Christmas party I was amazed as every family got every other family a gift. For someone who didn’t grow up with extended family gatherings, I appreciated the love and communion they shared. The following year the family began a new tradition of playing White Elephant which has given us the same level of fun and holiday togetherness at a lower price point.

For the uninitiated, White Elephant, also known as Yankee Swap, is a gift giving game where participants give bring a wrapped, unisex gift. Sometimes the gift can be a re-gift – something you received as a gift but don’t want or need. There’s usually a spending limit for the gift. You add up the gifts and everyone participating draws a number.

Let’s say there are 15 gifts. Whoever has number 1 selects from the pile, opens their gift, then sits down (moral of the story: you don’t want to get “1”). “2” then can steal “1’s” gift or select from the pile. If “3” decides to steal “1’s” gift, “1” must go back to the pile and select another gift. And so on until “15.” There are many variations: some groups put a limit on how many times a gift could be stolen or how many times a person can be stolen from. Others allow participants to go to the pile first, open the gift and then decide whether to steal someone else’s gift. Whatever you decide you’re house rules to be, it’s a great way to save money by getting only one gift instead of 15.

Another alternative gift giving solution is Secret Santa. You put all the family members names in a hat and pick one that you’ll buy a gift for. Like White Elephant, most families have a spending limit to keep things economical. Some families include wish list items. A perfect time to do this is Thanksgiving when most of the family is gather together. Otherwise, you can use an online tool to organize it; Google “Secret Santa generator” for ideas.

What other suggestions do you have for saving money for the holiday season? Leave a comment below.

Stay the Course (or Not Freaking Out when the Stock Market Goes Down)

Photo by Markus Spiske on Unsplash

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First off, Happy Belated Thanksgiving! I hope your Turkey Day was full of good food and loving family. Now back to the money stuff.

If you’ve been watching the financial news lately you’ve heard that the stock market has been going down, erasing all the gains it made earlier in the year. If you’re already in the market you may be wondering about your 401(k). If you’ve been skittish about entering the market, this news probably reinforces your fears. But you know what I’m doing? Keep on keepin’ on.

Wait, what? That’s right. I’m continuing to invest in my retirement accounts at work and my Roth IRA. I’m not pulling out my money and stuffing it under a mattress. But Nneka, aren’t you scared of losing it all? Of course, it’s scary to see my accounts at the same level they were a few months ago. But it helps me to remember a few things.

The market bounces back (eventually)

Though not as certain as death and taxes, historically the US stock market tends to go up. Is there a risk that I can lose my shirt? Sure. But if the markets are doing so poorly that all my money is gone, there are probably larger situations at play. Like a zombie apocalypse. Nuclear war. The closing of all Targets in North America. In those instances, the stock market will be the least of my worries.

When the market dropped in 2008, I panicked. I didn’t pull my money out, but I stopped contributing to my Roth IRA, the only retirement account I had at the time. However, after playing around with the Portfolio Visualizer Backtest Portfolio I realized that I could have had thousands, if not tens of thousands, more in my retirement account today if I kept contributing.

I have a diverse portfolio

We’ve all heard the adage “Don’t put all your eggs in one basket.” A scriptural equivalent is Ecclesiastes 11:6 (NIV) “Sow your seed in the morning, and at evening let your hands not be idle, for you do not know which will succeed, whether this or that, or whether both will do equally well.” When I was a teenager, I worked at a well-known clothing store (let’s just say I sold a lot of khakis). I heard a fellow co-worker complaining that she put her entire 401(k) in company stock, which wasn’t doing well at the time. I could help but think, why would you put all your money into one stock?

Now, full disclosure, I’m not a financial planner, but for my peace of mind I’ve found a mix of stock (both US and international) and bond mutual funds help to ride out market ups and downs. I encourage you to check out the The Bogleheads’ Guide to Investing and The Bogleheads’ Guide to Retirement Planning to give you an overview of investing in the stock market. They’ve given me a wealth of knowledge about the different aspects of financial planning and to help me create my own investment plan. Speaking of which…

Remember your plan

Why are you investing your money to begin with? For me, I put money in these accounts for my retirement, which is about a couple of decades away. I’m investing for the long haul and won’t need to touch it for many years. Therefore, I can ride out this downturn and wait for the market to rebound. You need you have your own investment goals to guide you when the market takes a tumble. For example, if you’re closer to retirement than I am, perhaps your plan is to move your investments to bonds and bond mutual funds to protect your remaining gains. Bottom line, whatever you decide to do shouldn’t be a knee-jerk reaction. Rather, it should be in line with your original plan and goals for this money.

How have you been reacting to the latest financial news? Leave a comment below.

Why Do You Want to Budget?

So, I started to make grand plans to create a multi-part series on how to budget, tricks and tips… but then I realized I didn’t address the why or the mindset behind budgeting.

The Why

At the risk of sounding like a bad acting coach, what is your motivation? Budgets are a lot like flossing. You know it’s a good thing to do, but you have a be motivated by something to be consistent day in, day out.

One way to help stay motivated us to think about what goal(s) do you hope to accomplish by having a budget. Do you want to get out of debt? Save for a house or your child’s education? Build an emergency fund? These things won’t happen with magic pixie dust. Hoping that Jesus comes back before AMEX is due is also not a viable plan. And those who marry for money usually end up paying for it.

My why is simple – I don’t want to be broke. While I definitely had enough to eat, growing up there was no room for extras like ballet classes or summer camps. I didn’t want to live paycheck to paycheck, but I certainly didn’t want to blow my hard earned money on meaningless stuff. I wanted to pay off my school loans and have a emergency fund big enough to carry me through a rainy day. And the occasional trip wouldn’t hurt. Having these goals help me to stay focused on where I want my money to go instead of looking up at the end of the month and wondering where all my money went.

What about you? What are your 2-3 goals you hope to accomplish with a budget? Write them down. Put them in your wallet by your credit card if needed so that you can remain vigilant in sticking to your goals.

The Mindset

Now that you have your why, you need to have to right mindset to carry them through. For example, you may have a good reason for saving, but if you don’t believe that you can accomplish your goals it will become a self-fulfilling prophecy. There are some mindsets we have to get rid of in order to accomplish our financial goals:

False Mindset #1: Budgets aren’t fun

Repeat after me: budgets lead to freedom, not deprivation. On the surface, budgets can feel restricting. You’re not “free” to spend your money on anything your heart desires. However, all of that “free” spending ended up costing you something, didn’t it? That freedom really led you to become a slave to your debt.

Budgets put you back into control. Instead of your money being spoken for, you tell your dollars where to go. Yes, as you work to pull yourself out of debt, you might not be able to buy what you want right now. But having a budget doesn’t mean that you can’t have any fun. In fact, I encourage you to have a category for fun/entertainment/hobbies or the like. You just have to allocate funds to your fun.

False Mindset #2: I can’t afford to budget

Frankly, most of us can’t afford not having a budget. I know things seems tight now, but having a budget can relieve some of that stress. By taking a hard look at the numbers you might find wiggle room you didn’t realized existed.

Again, budgets put you back into control. You go from reacting to situations to being proactive. For example, instead of freaking out if your car needs new break pads, because you’ve set aside some money in your emergency fund you can pay for it without setting your finances back.

Finally, remember that something is better than nothing. For some of us, saving $5 or 10 a week all you can do. That’s better than $0. Get encouragement from Theodore Roosevelt: “Do what you can, with what you have, where you are.” Allow the progress to build upon itself and you see your savings grow bit by bit.

Instead of these false mindsets, arm yourself with positive, yet realistic ones. If you have debt, you didn’t acquire it overnight. Therefore it will take some time to get out of it. If you want to save for a goal, it will also take time. But one of my favorite scriptures regarding finances is Proverbs 14:23 (NIV) “All hard work brings a profit, but mere talk leads only to poverty.” Don’t just talk about getting your finances in order, do something about it. It may be a long journey and there may be set backs, but keep at it. It will yield a profit.

What about you? What mindsets help you stick to your budget? Leave a comment below.

How I Paid Off $50K in Student Loans (or How Much Can Two Pieces of Paper Cost?)

Photo by Vasily Koloda on Unsplash

I must confess, the only debt I’ve had so far is student loans. While generally considered “good” debt because a degree generally leads to higher lifetime earnings, you still own somebody some money. Sometimes a lot of money.

I went to a small, private liberal arts (read: expensive) college. Total loans: about $20,000. I also went to back to get my master’s degree in Public Health at a larger private school (read: crazy expensive). Total: about $30,000. However, I was able to pay both off in about five years. (Sorry, this isn’t a “I paid of $100K in 2 weeks” article.) There was no magic bullet, but slowly and steady progress. I don’t have any regrets about attending either school, however there are some things I did might have done different if I had a time machine.

Side note: Mr. H&H had to good sense to attend state school (read: mad cheap). When we got married and he told me how much he owed, I laughed. We put that one away relatively quickly. Now back to my story.

What I Did Right

I took out a reasonable amount

While no loans would have been ideal, I was conscience that I needed to keep my borrowing at a minimum. I often read author Liz Weston’s work on the used-to-be-awesome MSM Money site. She advised not taking out more than two-thirds of your starting salary in loans. At the time the starting salary for my field was around $30,000 so having $20,000 in loans was right at the cap.

I lived cheaply

I was still living at home once I got a full-time job (with dental!). Like a good daughter, I wrote a check for my mom for a portion of the rent, but she refused to accept it. (Hey, I tried). But instead of spending it I socked it away and continue to save. When I moved out several months later, I shared an apartment with a couple of women from church instead of looking for my own place, just because I was “grown.” You can’t be grown and broke at the same time. Amen. Because I kept my housing costs low I was able to send more back to my overlords student loans.

I wrote checks (i.e. I paid down the principal)

A good friend of my told me that she would send large checks of $500 and $1,000 to pay down her loans faster. Being the broke, newly minted graduate that I was, I initially just paid the minimums. However I remembered the wisdom of my girlfriend. After creating my budget and setting aside money in an emergency fund, I threw whatever extra money I had at the principal.

What I Would Have Done Differently

Not taking a private loan with a variable interest rate

The summer before my senior year in college I did a summer study aboard program in Paris (Je ne regrette rien). To do so I need to take a $4,000 loan with an institution that I’ll affectionately refer to as “EvilBank” that needed a co-signer for. So I reluctantly asked the closest relative with the best credit and off I went. The loan was deferred until graduation, but had a variable interest rate that seemed to go up every month. In addition, since it was a private loan I couldn’t consolidate it. Ugh. Needless to say I threw any extra pennies at EvilBank first before my government loans so that I would be done with them and their ever-changing interest rates. Good riddance.

Not continuing to pay off my undergrad loans while in grad school

When I started grad school my government loans went into automatic deferment. What I didn’t realize is that the interest continued to accrue during the three years (hey, I went part-time!) I was in school. I could have avoided paying the interest of I had only continued to send in payments. Alas.

The main point I hope you takeaway is that it can be done. The most important thing is the set up a reasonable budget so that you can find any extra money to pay down the loans.

How about you? Any other tips that helped you pay off your loans? Leave a comment below.

Why I Don’t Own a Car (or How to Figure Out If You Really Can Afford Something)

Some weekends, I miss having a car. In college, I had a 15 year old Camry that I named Renee. A few years ago it seemed like every one of our couple friends had a car. I felt bad always asking for a ride, but at least I had gas money. In New York City, car ownership can be very expensive in terms of money and time. In addition to regular maintenance, you can spend a ton of money parking your car in a lot (read: $$$) or spend literally an hour or more looking for a parking spot. Some of my deepest prayers have come from looking for parking in my neighborhood after 8pm. My ears because extra sensitive as I listen for any hint of an engine revving up. My boldness has increased as I’ve asked complete strangers, “Are you coming out?”

But back to my story. Mr. H&H and I are a rarity among friends in that we’re a couple where both of us know how to drive (#relationshipgoals?). Family members were asking if we were going to buy a car. To be honest, I was jealous of the easy of being up to get up, go, and escape the city/do grocery shopping/get home without dealing with fellow New Yorkers on the train like my friends with wheels did. So we talked about it. Should we get a car?

Eventually we decided against it, but these are the steps that I went through to figure out whether or not we should get some wheels. However, these steps can be applicable for any big purchase.

Do the Math

I wanted a car. I could have talked myself into needing a car. I could have even spiritualized the decision: We could help so many people! Give rides after church! Teach others how to drive! But first and foremost, I had to run the numbers without emotion.

To calculate whether or not it made sense to get a car, I got a lot of data points. The cost of parking in my building. I asked friends how much they spent on car insurance. I looked at the price of used cars (‘cause new cars are generally foolishness) with the make, model, and features I was interested in. I considered gas prices, which at the time was around $4 a gallon. Result? (Drum roll please.) I figured out it was cheaper to take a cab from every place we would potentially drive to and fro then it was to own a car. Math doesn’t lie.

If you need to decide whether or not to make a big spending decision, step back for a minute and run the numbers to see if it makes sense for your family. Too often we can make a decision based on fear (if I don’t send my children to private school, they’ll never be successful), jealousy (I want a house like she has), or without considering the full costs (I can afford the monthly payments, so I’m good).

Determine Your Financial Priorities

That being said, we still could have afford to get a car but we had to consider what we would have to give up in return. For example, most friends who had a car didn’t have cable. Mr H&H and I love to travel, but looking at the budget we could not do both. So we decided to pump the breaks on car talk.

When deciding whether to add a new expense into your budget, you have to determine whether it’s in alignment with your financial goals and priorities. If your goal is to get out of debt but you’ve never met a sale you didn’t like, you are not in alignment. If you want to take a dream trip, yet you eat out all the time, you aren’t living your priorities. Unless you are Warren Buffet reading this, we all have limited resources and need to prioritize what’s most important in our current life stage

Plan for the Future

Of course, our thoughts on car ownership may change if we ever get around to having kids. Likewise, you might have a purchase that might not be needed now, but may come up in the near future. This is where sinking funds come in. We could create a Car Fund to save a little each month for the eventually purchase. If you’re dating someone and it’s looking serious, why not start a Wedding Fund?

In the meantime, I’ll set aside some gas money.

What about you? Any other thoughts about how to make a big purchase? Leave a comment below.

How to use sinking funds (or how to stop busting your budget)

Budgets. Hardly anyone like them, but they are necessary in order to get your finances under control. However, they have a problem. They are great for tracking regular monthly expenses, but what happens when you have a bill that occurs quarterly or annually? Usually a mad scramble to gather as much cash to pay it. But what if you didn’t have to look under couch cushions to pay your renter’s insurance? Sinking funds are the answer.

But what are sinking funds? Basically they are separate savings accounts earmarked for a particular purpose. They are useful for what I call regular irregular expenses and irregular irregular expenses.

Regular irregular expenses: expenses that you know are coming, but don’t happen on a monthly basis. Examples include summer camp fees, taxes you pay quarterly, and of course the holidays, such as Christmas.
Irregular irregular expenses: inevitable expenses that don’t happen on a schedule. If you own a car, it eventually will need a repair. Clothes wear out. One month you’ll have two baby showers and your best friend’s birthday, the next month is as quiet as a church pew on Saturday night.

Here are some examples of my sinking funds:

Christmas – includes what we’ll spend on presents, tree and other decorations
Clothing – it use to be a regular category in our budget, but there was too much fluctuation. One month we would spend nothing. The next, a new pair of socks. The following month, my husband needed a new suit.
Gifts – non-Christmas gifts. Think birthdays, baby and wedding showers.
Missions – we give an annual missions contribution through our church, so we set aside an amount monthly for this purpose.
Renters Insurance – it’s cheaper to pay it annually, so we set aside a certain amount each month in this account.
Vacation – in addition to our annual vacation we set aside money for any church retreats.

Sounds great? How do I set it up?

I suggest an online bank such as Capital One or Ally which allow multiple savings accounts and have a higher interest rates than your local brick and mortar bank. An online bank also helps keeps the temptation to impulse spend at bay since it takes about two business days to transfer money to your checking account.

Next, determine your categories. Look at your bank and credit card statements over the past year for any irregular expenses that would be well served by a sinking fund. While you’re looking at your statements calculate how much you spend over the last year. Let’s say you spent $600 on clothing last year. That means you can set aside $50 a month your clothing sinking fund.

Cool. So how does it work?

Let’s say it’s January. You have $50 automatically deposited in your Clothing Sinking Fund. You make no clothing purchases that month so your balance at the end of the month is $50. In February another $50 is added to your fund, but you needed new socks costing $10. At the end of the month you move $10 from your sinking fund to your checking account to reimburse yourself. You have $90 left in your account.

Do you use sinking funds? If so, what other categories do you have. Leave a comment below.