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Establishing An Annual Expense Fund

Debt is a shackle that prevents its prisoners from moving forward in many areas of life.  We’ve seen debt be a barrier to accepting a dream job, to making a future move, to buying a home, and even to getting married.

Part of what we do here in our practice is to help people separate themselves from debt.

And part of that separation from debt is the implementation of an annual expense fund. 

An annual expense fund is a distinct savings account at the same institution as your checking account. After you set this account up, you’ll make regular deposits and withdrawals from it as determined by your budget.

Examples of annual expenses might include painting the interior of your home, your summer vacation, seasonal clothing, etc.

Here are the steps to establishing an annual expense fund:

  1. Open a savings account at the same bank or credit union where your primary checking account is.
  2. Make a list of all annual expenses–auto, home (like expected updates or repairs), home annual costs (non-escrowed taxes, homeowner’s insurance, HOA dues), vacation/planned travel, gifts (like Christmas) and miscellaneous—that you expect to have in the next 12 months. Better yet, use our free downloadable Annual Expense Worksheet!
  3. Note: you may want to consider looking at the past 12 months’ bank statements to help you brainstorm the future annual expenses.
  4. Value these amounts. Here’s an example:
  • new tires for the truck……$900
  • property taxes……………… $2700
  • Colorado ski vacation……$5000
  1. Note: these do not need to be exact amounts as you are future predicting. Just round numbers, and it’s best to over-estimate.
  2. Total all these annual amounts and divide by 12. You should be making this deposit each month into this savings account (aka annual expense account).
  3. Make a budget and pay yourself first by transferring this monthly amount into your newly established annual expense fund! When one of these amounts is due to be paid, then you transfer that from your savings into your checking account. While there are definitely nuances to this account which a financial coach can help with, you’ll be well on you way to a regular habit of saving money.

Now, you can enjoy the peace of mind as a side effect of disciplined planning and saving!

Want to know more?  Click here for our free annual expense fund worksheet!

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