How to Budget for Non-monthly Expenses with an Escrow Account

People that make house payments knows that an escrow account is for things like taxes, and homeowners insurance. Out of each monthly payment on your home, money goes towards the interest, principal, and also escrow.

I recently read an article about a lady who got tired of always having things pop up and not having enough funds to pay for them. So what she decided to do was set up her own personal escrow account for these things.

This is how she went about setting up this unique idea. She first totaled up all her quarterly, semi-annually, and annually payments that she had. These were things like life insurance, car insurance, license plates, magazine subscriptions, trash collection, membership fees to different organizations,fitness club and birthday gifts.

Monthly payments like power, rent, water, car payments, and regular bills paid by the month were not allowed in this account.

She then went and added all these expenses up and divided them 12 (months). Now she knew how much she had to put away into her escrow account monthly . She then had this automatically withdrawn from her checking account monthly.

To make it easier and to make some money on this, she had it go into another banking account. she shopped around trying to find the best deal available. In this situation, she decided to go with ING Direct. They have no minimums or fees.

From this account, she only paid for the items she had previously listed in her escrow account.

This is an easy way to budget. It turns irregular expenses into a fixed expense account. To get the account started though, it is a good idea to start off with a set amount of $500. However, if you can't do that, try not to draw it out for a few months. You need to build up the base for the expenses later.

Some individuals thought that this is a good way to build up an emergency expense account. This is a wrong assumption. Let me explain. If you have say a automobile breakdown or a medical expense, you would be depleting this fund. You need to keep the two separate. with this method you would actually have three different accounts. They would be your monthly budget expenses, emergency, and escrow. The monthly budget and escrow budget are going to get fed each month. However, the emergency one can reach a certain point or amount and be locked in. You wouldn't have to feed it unless you wanted to.

Some individuals use their emergency fund to pay things like insurance premiums that are do semi annually or annually. This is not what an emergency fund is established for. It is for emergency items only.

There is a downside to setting up an escrow account. It does limit the funds that you have available for your monthly expenses. You are losing some purchasing power.

You basically have to decide, do I want to suffer a little now or a lot later? One good thing about establishing an escrow account is that it can also make you a little money while it is in an interest making account.

For some individuals a personal escrow account could be complex. Still it would be an excellent way to handle non-monthly expenses.

sources; http://getrichslowly.org/blog/