While we may risk dampening your holiday spirit by even mentioning the phrase “credit card bill,” it is a generally held truth for most Americans that credit card bills look ugly after the holidays, and for some, this is a serious problem. Even for those who plan ahead and/or exert restraint in the number and cost of their gift purchases, the holidays still often entail an uptick in monthly expenses. If you cannot cover those expenses out of monthly cash flow or a temporary withdrawal from savings, it could result in high credit card interest payments (and I don’t think the credit card company was on your gift list!). This is not a unique phenomenon though. Most of us have to pay some “lumpy expenses” over the course of the year that might sometimes catch us and our budget by surprise—e.g. auto insurance, property taxes, school expenses, etc. To plan for holiday spending and other lumpy expenses, we offer the following tips.
Monthly Withdrawals. One option for smoothing out lumpy expenses over the course of the year is to make monthly withdrawals from your checking account to a savings account set up solely for the purpose of holding those funds until the necessary time. At Capital One 360, for example, you can establish up to 25 savings accounts with different nicknames. If you know that you always spend $1,200 extra around the holidays and $600 per year on property tax for your car, you can set up a “Holiday Spending” savings account with a $100/month automatic transfer and a “Property Tax” savings account with a $50/month automatic transfer, and when the time comes to pay the bills, the money will be ready and waiting (having earned a slight amount of interest in the meantime). Alternatively, for some expenses, you may be able to set up a monthly payment plan instead of paying in lump sums, e.g., for car taxes and real estate taxes in Fairfax County, Virginia. Just be aware if there are any additional charges for doing so.
Emergency Fund. Alternatively, you can plan to establish an emergency fund that will more than compensate for the ebbs and flows in your monthly budget over the course of the year. The necessary cushion may differ among households, but if you are just starting out, aim to build a savings account of $5,000 to $10,000. You can always try to increase your base level of savings over time if you find that this amount is not sufficient to cover lumpy expenses during the year or to build a greater level of protection against interruptions in income. With savings rates still at reasonably high levels (compared to most of the past decade), you can earn significant interest on your savings while setting yourself up for less stressful monthly budgeting. Ally Bank, American Express, and Discover Online Savings all have high-yield savings accounts offering a current yield between 3.85% and 3.90%.
Operate on a Cash Basis. For those who want or need to exert even more discipline in their monthly budgets, another option is to park the credit cards on the bench or in the freezer and pay for expenses in cash. (Remember cash? You may have carried some in your wallet back in the 20th century?) One method for doing this is the “envelope system” in which you determine the categories of expenses that you face on a monthly basis (e.g. groceries, entertainment, clothes, gas, etc.) and the amount that you spend (or should spend) in each category, and then you fill up each envelope with that amount of cash after every payday. When the cash runs out, you cannot spend any more in that category until the next payday. Of course, it takes some trial and error to find the correct amounts and some discipline to manage each envelope effectively to last throughout the month, but using a more tangible version of money often helps in curbing spending, if that is your goal. And, for lumpy expenses, you can simply create an envelope for each one that is filled monthly, and then the funds are re-deposited into the bank when the time comes to pay the bill.
Use Budgeting Software. Another option for managing lumpy (and other) expenses is to utilize budgeting software, such as Quicken or Monarch Money. This software can help you forecast future cash needs and monitor monthly balances to see when your expenses might be running high.
If this advice comes too late and you already find yourself giving a very generous interest payment to the credit card company each month, check out our prior post on “Dealing with That Four Letter Word: DEBT.”
Despite addressing such a non-festive issue as budgeting in this month’s blog, we at PFS do wish all of our clients and friends a very joyful and peaceful holiday season.
If you have any questions about your financial future, we're here to help. Please use this form or feel free to call or e-mail us.
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