Canadian Finance Blog

How to Use Savings Accounts for Irregular Expenses

Posted: 25 Apr 2011 02:00 AM PDT

An important aspect of personal finance success is to set goals and plan well to make sure you have sufficient savings. Many people are successfully saving for retirement or college expenses, but there are many irregular expenses that often come unplanned that can throw savings goals into a tailspin. The only way to stay on top of your personal finances is to prepare for the worst.

How to Establish Your Savings Plan

Ideally, you should set up multiple savings accounts for different purposes. Getting too specific can result in having entirely too many accounts to manage, but having a few different accounts makes it easy to see how much money you have for each type of expense category. Here are some ideas of the common general accounts you can set up to plan for irregular expenses, as well as what type of expenses can be incorporated into each savings category:

Emergency Funds

Emergencies can encompass many things including home repairs, medical expenses, job loss, or literal emergencies such as weather-related evacuations that require you have cash available to get out of the way of the oncoming storm! Financial experts recommend stashing away 6-12 months worth of living expenses in an emergency fund. This total can rise into the thousands of dollars – but don't be discouraged. Starting somewhere is just as important as achieving your ultimate goal.

Vacations

Many people skip vacations all together because they don’t have enough money to go on a trip. By simply putting aside a few bucks each payday, within a year's time it can add up to considerable savings. Look for savings accounts that have a good interest rate to help add to your savings. Some of the most competitive rates you will find may be through online facilities offering higher interest returns than brick and mortar bank institutions. Look around for cost-effective, high interest-bearing savings accounts and start planning for your next trip.

Taxes

If you do not have your property taxes and other home-related taxes in escrow, you should start tucking away your money, a little at a time, to ensure you can cover any outstanding tax bills. Taxes can be a big drain on your regular budget if you don’t plan in advance. Your tax preparer can help break down the total amount you may owe for taxes each year and help calculate how much cash you would have to put away each payday to cover a year's worth of taxes.

Big Ticket Items

Most consumers will have a need or desire for a big ticket item such as new furniture or appliances at some point in time. Financial experts recommend a waiting period before shelling out the cash for a large-priced item to be sure you can afford it and to give you a chance to compare pricing from other retailers. It can be an excellent idea to start stashing $5-$10 a paycheck into such a savings account to prepare for these purchases well in advance. The advantage of setting up a savings account specifically for "big ticket items" is that you'll always have the cash on hand when you spot a great sale and you will not have to worry about racking up excessive credit card expenses and finance charges.

Holiday Shopping

It is no secret that people tend to go way overboard preparing for Christmas, spending too much money during the holiday season. In many cases, the overspending means they have put out more money than they can reasonably afford. It makes more sense to plan ahead. The holidays and birthdays for which you give gifts happen at the same time each calendar year, so you have an entire 12 months to plan for them and set the money aside before the big day arrives. Again, a few bucks each paycheck is all you need to start a Christmas Club or private account made specifically to cover the costs of gift-giving or the annual holiday party.

How to Make Savings Work

Ideally, the best way to save money is to start automating your savings. This is accomplished by setting up direct deposits right from your paycheck. It will take some logistical know-how to figure out how much money should go into each savings account, but over time, you'll have developed a no-effort savings plan that operates on auto-pilot. Start by looking at your budget and see where you can ration funds to be distributed into your various savings plans.

Even if you have to start small by contributing $5 to each account each pay period, the point is that you have started. As time goes on and you see your savings grow in several categories, chances are you will be more motivated to improve your savings plan. Increase your savings when you can. When you receive unexpected windfalls, including an inheritance, work bonus, or even birthday money, divide up the amount and deposit shares into each of the savings accounts you maintain. You are putting your cash to good use and are creating a more stable, more flexible financial life and future.

Author Bio: Debbie Dragon is a freelance writer for ComplexSearch, an online bank rate tracker. Find high interest savings accounts and CD Rates with ComplexSearch.com.

How to Use Savings Accounts for Irregular Expenses originally appeared on Canadian Finance Blog on April 25, 2011.