We can’t possibly remember every important detail of life. That’s why we have calendars, oil change reminder stickers, auto bill-pay, etc. We set reminders and automate what we can so we don’t have to keep it all straight in our mind (which is impossible anyway)!
This same principle applies to one of the trickiest areas of our finances. We call them “lumpy” expenses. These are the expenses we know will happen, but we don’t always know when they will occur or how much they will be. This can include:
- Car repair and replacement
- Home repair
- Medical expenses and others
Most of the time, these expenses ARE NOT EMERGENCIES! These are life expenses that happen to everyone so we need to plan for them.
The way we teach people to plan for lumpy expenses is to smooth them out and automatically save for them. For example, let’s say I want to spend $6,000 / year on vacations. Instead of “hoping” we have enough in our checking account to cover this expense, let’s save $500 / month into a savings sub-account (a separate account that is earmarked for a specific purpose). This transforms a lumpy expense into a smooth and predictable expense similar to your cell phone bill. Finally, when you are ready to take your vacation, you use the funds in your “vacation” account for a completely guilt free trip!
We have found Capital One 360’s savings accounts to be a great solution. I have used them for years and our family loves them!
We already do this in other areas. We automatically save for retirement. We automatically pay our bills each month. We keep a sticker on our windshield to remind us to get our oil changed. Let’s apply this principle to our major lumpy expenses.