For over thirty years, we have encouraged clients to utilize our “Save-to-Spend” System – a simple, but effective way to manage your cash flow in a painless manner. By saving a relatively small amount each month, you are prepared for the large, unexpected expenses. Save-to-Spend is the opposite of what most Americans do, which is “Borrow-to-Spend.” One approach grows wealth, the other is a drain on long-term dreams. If you aren’t familiar with this concept or if you have lost track of the system, below is a quick refresher.
Know what you are spending
To make this system work, you need to first have a general idea of your average routine monthly expenses that you pay every month. This will help you understand how much money is available to set aside each month for large, non-routine expenses.
Identify non-routine expenses
There are two general categories for these non-routine expenses:
- Predictable Non-Routine Expenses – These include quarterly, semi-annual, or annual expenses, such as insurance premiums or property taxes (if not in escrow). This can also include your quarterly income tax payments, annual vacation expenses, private school tuition and Christmas spending. These are easy to identify and estimate the annual expense, since costs tend to stay in a general range from year to year.
- Unpredictable or Discretionary Expenditures – These include the big surprises that are difficult to pinpoint years in advance – a new roof, landscaping work, large repair bill or new car purchase. For your home, we recommend setting aside approximately 3% to 5% of your home value each year for maintenance, renovations and furnishing expenses. For your cars, think about your normal purchase price and how long you tend to keep them. This will help you come up with an annual amount for car replacement.
Calculate your monthly amount needed
Simply add up your annual amount of Non-Routine Expenses and divide the total by 12. This will give you the amount to automatically transfer into a savings account each month. If you can’t spare the full amount from your monthly budget, we recommend at least funding enough to cover the predictable, non-routine expenses as noted above. You can create a goal to begin funding the full amount soon.
Automatically transfer funds into a Savings Account
Ideally, we recommend an automatic, monthly transfer of this amount into a savings account that is linked to your checking account. This way, the money is always quickly accessible. If you do not have a regular monthly salary, you can fund the account on a quarterly or annual basis with commissions, bonuses, etc. While bank interest rates remain low, you can find competitive interest rates on online savings accounts or with local banks.
Over the years we have observed some clients turning this system into a game, seeing how they can grow their account. We have seen some very creative behaviors for keeping a healthy balance in this account. Having a specific minimum balance seems to give them a feeling of comfort.
If you want more information on the Save-to-Spend System or want help in getting it set up, let us know. We would be happy to discuss it at our next meeting. As always, we are here for you. Please email or call if you want to set up a Zoom videoconference meeting or talk by phone.
Mary McCraw, CFP®
© 2021 The Arkansas Financial Group, Inc., All rights reserved.
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