In 2001, I read a book called Debt-Proof Living by Mary Hunt. The book was easy to read, relatable, and very much about the “how-to” of getting out of debt and regaining control of your financial life.
One of the concepts stuck that stuck with me the most was the “Freedom Account”. Contrary to what you might think, it is not an account for bail bonds or secret savings. This is a spending account.
The basic concept is that we all have annual expenses or expenses that come around intermittently. They are predictable in that we know they will happen, but for some of these expenses, we just don’t know when they will happen. Car repairs and personal property taxes are great examples. We also usually have some “found money” or unscheduled income. Rather than absorbing this money in your day to day lives, set it aside, either in your new Freedom account or a mad money stash.
How To Start a Freedom Account:
- Make a list of your anticipated expenses throughout the year. Go through your bank account, think back as far as you can: oil changes, gifts, personal property taxes, home and vehicle maintenance, clothes, anything you can think of that comes up irregularly or is in a larger amount that you would rather not pay all at once.
- Total up the amounts for each category. Divide the total by 12. This tells you how much you need to set aside each month for each category in order to be prepared when the expense arises.
- Open a separate checking account, a joint one if you are married. This should be a no-frills, basic checking account, with no fees if possible. If you get a sign-up bonus for opening the account, it should be deposited in this account.
- Get a notebook or open up excel. This will be your deposit and withdrawal log. You may be able to set up your online account with labels, but you can do this just as well with pen and paper or an Excel spreadsheet with a tab for each category.
- Set up a monthly deposit into your new Freedom Account from your regular checking account. Time it so it is on the same day as payday. I promise after the first few months you won’t even notice it is gone.
- Each month, enter in your spreadsheet or notebook the amount you are adding or subtracting from each category.
- Keep it up. Your goal should be to have full year requirement in each category.
- Once you have fully funded each category, add new ones that you realize you need or stop the deposits altogether until you have to make a withdrawal. Replenish the account as needed based on your withdrawals or new requirements.
If your expenses seem high and there is no way you can swing the monthly amount for all of the anticipated expenses, maybe because you have been paying them with credit cards in the past, break it down and start with half the needed amount. You can pick a few categories and work to get them to your anticipated annual amount, and then move to the next priority accounts. Or you can bite the bullet and transfer the whole amount needed and adjust elsewhere. These expense with still happen whether or not you have cash for them.
It can be bumpy for the first few months, nothing is completely predictable. Look at the illustration below.
- You started your Freedom Account in February.
- In March you needed an oil change. Paid it out of your Freedom Account, not your regular Household 6 account.
- In April you need two new tires and they cost $150.
- There is not enough in your Auto Maintenance category to pay for both of them.
- Here’s what you do: Pay cash of $112.45 for the tires out of your Freedom Account and pay the balance with your credit card.
- Don’t rob your other Freedom Account categories. Those expenses will still be coming around. If you didn’t have the $112.45, you would have used your credit card for the whole amount anyway, right?
- The next month, make your $50 deposit in your Auto Maintenance account. Immediately pay the credit card the $37.55 for the balance of the tires.
- Keep adding to your account each month.Withdrawing and rebuilding the balance as needed to keep it fully funded.
|Auto Maintenance||$50/month – $600 annual||Running Total|
|February 1, 2017||$50||$50|
|March 1, 2017||$50||$100|
|March 17, 2017 – Oil Change||-$37.55||$62.45|
|April 1, 2017||$50||$112.45|
|April 3, 2017 – Tires||-$112.45||0|
|May 1, 2017||$50||$50|
|May 1, 2017 – bal of tires||-$37.55||$12.45|
|June 1, 2017||$50||$62.45|
|July 1, 2017||$50||$112.45|
|August 1, 2017||$50||$162.45|
What do you think? Will this work for you? What pitfalls can you see happening? If you have any questions or need guidance, please contact me here.