As Christmas approaches and the stores get more and more aggressive with their sales, far too many people are buying on credit without thinking about how much they are spending and the consequences of paying the minimum payment.
- 52% will pay it off in full in January
- 23% will pay by the end of tax season
- 13% will pay if off by the end of the summer
- 6% by the beginning of the next holiday season and
- 6% past the end of the next holiday season
There’s a better way to do it. In fact, it will help you will all of your known, but irregular expenses. I call it my Revolving Savings account. It’s a simple concept, but it works!
First, let’s identify what some of those known but irregular expenses are:
- Holidays
- Birthdays
- Car Registration
- Car Insurance (unless paid monthly)
- Life Insurance (unless paid monthly)
- Tuition and books
- Vacations
Those are the most common ones that I see, but you may have a few other things that would fit in there as well.
The next step is to make a list of each month, then go through and plug all your known, but irregular expenses in there along with how much you are going to spend. Your calendar might look like this.
| JANUARY | FEBRUARY | MARCH | APRIL |
|---|---|---|---|
| Books: $300 | Spring Break: $200 |
| MAY | JUNE | JULY | AUGUST |
|---|---|---|---|
| Dad Birthday: $20 | Mom Birthday: $30 Books: $300 |
| SEPTEMBER | OCTOBER | NOVEMBER | DECEMBER |
|---|---|---|---|
| Car Registration: $85 | Christmas: $200 |
The next step is to add up the total – in this case the total is $1,135. You then take that $1,135, divide by 12, and you get how much you need to save up each month ($95). If that amount seems too high, you have a couple of options:
- Reduce how much you are spending on these categories, or
- Figure out a different way to fund some of the items
As an example of the second option you may consider times when you get extra money, such as a tax refund, to fund some items such as your Spring Break trip and Car Registration.
You then put that $95 in a separate account (I call this my Revolving Savings account) that you only use to pay for these expenses.
Each December my wife and I sit down and review the previous calendar and draw up a calendar for the next year. Not only does this make it less stressful as you approach each of these events, but you can actually save money by buying things when they are on sale.
If you have major expenses that come up early in the year you may want to run your Revolving Savings calendar on a different schedule (i.e. July-June of each year instead of January-December). In the calendar above the person is going to need $300 in January, but only have $95 if they run their Revolving calendar from January-December. If they ran their calendar April-March they would have enough money by the time they hit each expense.
As I said above, this is a simple concept, but it works!
Ryan H. Law, M.S., CFP®, AFC®
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