It’s time to talk about money and financial freedom again. I’ve previously written about getting back in control of your money, and now I’d like to share with you how I have learnt to take the next step and “fill the big bill bucket”. The problem is this, and we all know it. You’re plugging away, working your job through the week, taking your family out on the weekend, enjoying being with your friends and then, one day, quite unexpectedly, you receive one of those annoying letters in the mail. Those stupid little letters with the little window. What happens next is usually one of two reactions:
- Shock. You fling you arms in the air and run around your letterbox yelling and screaming in a panic.
- Stunned silence. You simple can not believe what you’re holding in your hands. Surely, this cannot be true!
And then, after you’ve either run out of puff from running around, been taken away to the loony bin, or blacked out and fainted, you come back to the letter with the little window. With trembling hands you carefully open the envelope and pull out the single piece of neatly, mechanically folded paper. Your car insurance is due in a couple of weeks. You’re eyes dart to the amount due at the bottom of the page and then the shock/stunned silence experience happens all over again.
It’s the “expected unexpected”. You knew deep down that this day would come, but for some reason, ignoring the fact that your insurance is always due at the same time every year doesn’t make the insurance company forget to send you the bill – I know, I’ve tried!
You probably then look at your bank balance and become really nervous. Funds will be very tight. Or, do you dare to use the plastic? Do you renew your insurance with the evil credit card?
But, what if…
OK, let’s go back in time. What if, and I’m just throwing it out there, when you paid your car insurance last year, you noted the amount somewhere, like in Evernote. And let’s assume the amount due was a nice even $1,200. At this point you know for a fact that the insurance company is going to be hounding at your door again in 12 months time looking for another $1,200. So instead of burying your head in the sand, you put a plan into action and set aside just $100 per month for the next 12 months. What would happen?
In 12 months time when your insurance comes due again there’ll be no mad screaming or stunned silence. You’ll open the letter with the window, see that your insurance is due and… get this… you just pay it. That day. You have the $1,200 for this years insurance because you were able to forecast it 12 months ago and save towards it over the course of the year. That $100 per month now plays it’s part as you use that to pay the insurance renewal and then the cycle renews and you once again set aside a manageable amount of $100 per month so that next year the same thing happens.
No screaming. No tantrums. No credit card and, above all, no stress!
This principle can easily be applied to any amount you know you need to pay. Insurances and the like are perfect examples. They’re predictable in timing and amount. What other expenses might you have that you can set aside a small amount each month for? What about things like:
- Car Registration
- Property Taxes
- House and Contents Insurance
- Medical Deductible
Yep, that’s right, a holiday is something you can predict! You can use this principle to set aside some money each month and put it towards something fun! Even if you don’t have a holiday planned yet, why not save a little each month towards it then when the need for a holiday occurs, you can just up and go!
How it works
This whole system only works if you can track each of these predictable expenses. If you don’t keep track of what they are and how much you’ve set aside for each one, then very quickly you’ll end up back at the letterbox running around screaming with an envelope in your hand. Trust me, you do not want your neighbours to see this. They talk.
There is a system, a tool, that I personally use that really helps me get ready for these predictable expenses. It’s called YNAB (which stands for You Need A Budget). It’s an amazing application, that runs on both Windows and Mac, and takes care of your entire budget. I’m a computer geek (in case the blog hasn’t already given it away), so handling money and budgeting is definitely something I’m not good at and don’t like doing. But, with YNAB I can really understand where my money is going and how I can use it properly, and it really does all come back to this principle of predictable expenses. YNAB satisfies the geek in me too – it has apps for iPhone, Android and Kindle Fire (what??) and they sync with the main application using Dropbox.
By using YNAB and applying this and other simple principles, I’ve been able to really get a handle on my money. If it sounds like I’m trying to plug this application, I am. It really is that good! But! It only works if you follow the YNAB method (which is super easy).
Let me know in the comments below what happens to you when you have one of those “letterbox” moments. How do you handle those times?