KristiLyn Wilkinson, M.S., AFC Candidate
You might be familiar with this phrase if you have read Marie Kondo’s The Life-Changing Magic of Tidying Up. I’m here to tell you that revolving savings accounts are pretty life-changing as well! A revolving savings account is the magic that keeps irregular expenses from derailing your budget.
One of the main obstacles to budgeting that I hear from people is that they have expenses that don’t happen every month, that are larger in nature, and throw off their planning. For most people, we tend to live our financial lives month-to-month. Your rent or mortgage is due once a month, your car payment is due once a month, you pay for Netflix and piano lessons once a month, etc. You get the picture. But every month it seems like there are some expenses like a birthday, Christmas, annual insurance bill, college tuition, etc. that come creeping in.
The difference between irregular expenses and an “emergency” is that you know an irregular expense is going to happen, they just don’t happen regularly. I’m getting deep here, I know. Emergencies are unforeseen events that you don’t usually foresee happening. You plan for emergencies by having an emergency fund, but you plan for irregular expenses by creating a revolving savings account.
This type of savings account is called “revolving” because you put money in and pull money out regularly. You can set up one account or multiple accounts depending on how you like to manage your money, but the important thing is that it is separate from your emergency fund. You don’t want to be drawing money out of an emergency fund for irregular expenses. This type of account is usually just a regular savings account that you open through your bank or credit union. If you go into the bank and ask to open a revolving savings account, they will stare at you with a deer in the headlights look. You are just opening up a saving account and using it as a revolving savings account.
To create a revolving savings account, you add up all of your irregular expenses throughout the year. Take ten minutes and list all of the birthdays, holidays, insurances, anniversaries, etc. that happen for you during the year. Then you divide that amount by 12 and that number is what you put each month into a revolving savings account. That way when you have those irregular expenses come up during the year, you have money set aside to pay for them and they don’t derail your budget. Your future self will thank you- I promise!
Even though there are 12 months in the year, some people like to divide the total by 11 to give themselves a cushion in case there is one month when they aren’t able to save the money. One tip to make sure you are always funding your revolving savings account is to make it automatic. Have the money directly deposited into your revolving savings account. You won’t have to worry about remembering to transfer the money yourself. The money will be out of sight, out of mind, but you will be so glad when you have to pay for college textbooks or your wedding anniversary that you don’t suddenly have to come up with the money. One of our favorite sayings here at Utah Money Moms is that “Christmas is not an emergency!” It is, in fact, an irregular expense, and a revolving savings account lets you plan and prepare for it.
Don’t wait until January or the beginning of a month to get started. If you have a spouse or partner, make a date in the near future to set up a revolving savings account together. Why wait for this life-changing magic to start impacting your budget today?
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