Part of the reason why my credit card debt increased is because of my terrible self-control, especially during Black Friday *ahem* Thursday. Hence, the new closet purge rule.
But another huge reason why my debt increased was because of my car registration fee. Most of you probably know what I’m talking about. Every year, we need to register our vehicles with the DMV and, let me tell ya, it isn’t cheap. I paid $210 to register my car. Did I have that money set aside? Absolutely not. So onto the credit card it went.
Yes, I could have taken cash out of my emergency fund to cover it. But I couldn’t categorize this expense as an emergency – I knew it was coming! Every year, I pay the DMV to register my car, so I should have been prepared! Heck, I had 12 whole months to prepare for this cost!
The fact of the matter is – this is a necessary and irregular expense (irregular in the sense that it doesn’t occur monthly). Having my credit card debt increase because of an expense I should have been prepared for is not a good feeling and I don’t want it to happen again.
So, I opened up a new savings account – I call it my Personal Escrow Account.
What is a Personal Escrow Account?
I first read about the personal escrow account on Get Rich Slowly. You can head over there for a more thorough explanation of what it is. Basically – a personal escrow account is a separate bank account (mine is a savings account) where you regularly save for any irregular expenses.
When it comes time to pay these irregular expenses, you have the money set aside in your personal escrow account and aren’t surprised by the expense.
Why You Need a Personal Escrow Account
Anyone with irregular bills needs a personal escrow account! When I say “irregular” expenses, I mean any expense that isn’t monthly. That means your yearly car registration, annual gym membership fees, quarterly water bills, etc.
It’s a pain trying to plan your monthly budget with all these irregular deadlines floating around. I know for me, whenever I’m paying the house bills, I always have these conversations with myself:
“Is the water bill due this month or next? No… I think it’s the second month of every quarter…”
“Is the car registration due in November or December?”
“Is the trash bill every two months or three months?”
As you can see, keeping track of all the bills gets confusing, especially with different deadlines every month. Having a personal escrow account ensures that you have the money when the deadline does come around – whether it’s this month or next.
How Do I Set Up My Personal Escrow Account?
First, you should open a separate account for this purpose. Personally, I have my personal escrow account at Capital One 360. They make it easy to keep your different savings goals separate.
Next, make a list of all of your irregular expenses and how often you pay for them. For now, I’m just setting up my personal escrow account for my yearly vehicle registration with the DMV.
DMV Vehicle Registration: $210 (Yearly)
Divide that amount by 12.
DMV Vehicle Registration: $210 ÷ 12 = $17.50 per month
Now that you have your monthly savings amount, set up an automatic monthly transfer from your checking account into your personal escrow account. Personally, I rounded up to $20/month.
Instead of stressing out about a $210 expense that I should have been prepared for, I now set aside only $20/month so I can be fully prepared for the same expense next year. Since it’s an automatic transfer each month, I’ll get used to having $20 less each month.
$20 a month is a small enough amount for me to not really care about it leaving my checking each month. Honestly – I’ll hardly miss it!
What irregular expense do you have and how do you handle them?