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Frequently Asked Questions (FAQ)Question: I have some really big bills that only come up once or twice a year (like car insurance). They are so big that it is hard to come up with the money when they are due. I have tried to save some money for them, but it always seems to get spent and I have the same problem coming up with the money. Any suggestions? Answer: Yes. One very good answer to this kind of problem is often called "Funding" or "Reserving". Basically, it comes down to the common sense solution of putting a little money aside, but it adds the security of getting it out of sight so that it isn’t tempting to spend it. Besides the problem of coming up with a big lump sum is that it doesn’t really give you a good view of how much it costs to operate your car every month. If you are paying your insurance every six months, when you print your summary reports monthly, it looks like your car insurance doesn’t cost anything for 5 months, but is REALLY expensive one month. The fact is, the bill covers all six months, and each month costs the same. Option 1 When you sit down to make your monthly bill payments, write out a check to the company for one month’s worth of payment, but don’t send it to the company. When the end of the period comes, void the previous month’s checks, add their balance back in to your checking account, and you will have enough to make that monster payment! The biggest problem with this option is that you will have to keep track of the checks yourself- the computer can’t help a lot with it. The other problem is that you are never quite sure how much you have in reserve without adding up the checks. (Although that maybe an advantage if you are always tempted to fudge the reserve!) The biggest advantage? It’s easy! About voiding those checks; there are two ways to do it: 1. Go back and set the amount of all of them to zero (definitely NOT recommended), or 2. Create a transaction to add back all the checks, then declare all the checks and the canceling entry "cleared" on the next statement even though they didn’t actually clear the bank. Example: Let’s say that you have a $900 auto insurance bill for six months of insurance, and that it is due at the end of June. Let’s also say that you balance your checkbook the last day of each month. The transactions for your checking might look like this:
Not only does this method make sure that the money is not showing in your checkbook balance, it will show that your auto insurance costs $150 each month (including June!) Option 2 (Better) Basically the same, but this option will let you make a little money at the same time! Instead of leaving it in a checking account that earns no interest or little interest (generally ½% to 1%), move it to a savings account that earns a larger interest (generally 3% to 5%). It’s a little more work, but besides earning more money, it will actually make your summary reports more complete by showing your reserves. Set up a special savings account with the bank. Don’t simply deposit it with your regular savings- its too tempting to "Rob Peter to pay Paul" and too hard to keep them separate. Title it’s category something like "Auto Ins Reserve". This will show up on the summary report and tell you exactly how much is reserved for insurance. Now, create a debt type category titled something like "Insurance Not Billed". This time, when you make your monthly entry, enter 2 transactions: 1 to take the money out of the checking balance and put it in the reserve account, and one to show the monthly expense for insurance. Example: Using that same example of six month’s insurance from the checkbook transactions:
If you only enter those transactions, you won’t show the monthly amount of $150 and it will all pile up in June. To fix this problem, from the "Insurance Not Billed" account, enter these transactions:
This way you will get a series of monthly summary reports that will be easier to follow and you won’t have to scramble to pay those really big bills. |