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Diana's Freedom Account

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By dianakalt
September 5, 2002

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In a previous thread, a bit of a discussion related to short term savings or Freedom Accounts got started. I know that there are still quite a few folks that don't know about Freedom Accounts, so I thought I'd share a bit about mine, and how I manage it.

For those that don't know, the Freedom Account is basically a vehicle to help smooth out cash flow throughout the year by planning in advance for irregular expenses. I first learned of the concept on the Cheapskate Monthly website. I have used a freedom account for over 3 years now, and it is an absolute LIFESAVER to me.

A freedom account will have several different sub-accounts, based upon what irregular expense categories you want to plan for. The way I handle this is to have a checking account and keep track of the overall check register AND the balances for sub accounts within an excel spreadsheet.

How do you start planning a freedom account? One of the first things you need to do is look at your expenses and think about what items don't come up every month. Examples include Christmas presents or car insurance. You comprise a list of these categories, and write down how much per year you need for each category. For example, your list might include the following:

Car Insurance: $1200/year
Vacation: $1200/year
Gifts: $600/year
Total: $3000/year

After you've done that, you'll divide the dollars per year by the number of paychecks you get each year. If you are paid twice per month, you have 24 checks per year and thus you'd want $125/check to go into your freedom account: $50 for insurance, $50 for Vacation, and $25 for gifts. Every payday, you'll deposit $125 into your freedom account and then apportion those dollars to the correct category logically using your excel spreadsheet. When an expense comes up for one of your categories, you'll already have money set aside for it, and once you've paid that expense you deduct it from the category in your spreadsheet. It's pretty simple!

I have recommended doing a freedom account to several friends, and I've heard a lot of questions and comments from them about the idea. Here are a few of them, with my answers:

I can't afford to have a freedom account.
I maintain that most people can't afford NOT to have a freedom account. Many of the categories in my own freedom account are MANDATORY (like car insurance), and probably are in others' accounts as well. It makes sense that you might not be able to put money aside for optional things like gifts right away, but if you can't afford to save up for your car insurance or property tax each month, then your budget needs a serious look.

I want to start my freedom account NOW. My car insurance, which would be $50/payday, is actually due at the beginning of December. What do I do to account for this?
If you are trying to start a freedom account and it's only a short time before you have to pay for something that the FA plans for, then the best thing to do is to just save a little extra until the first time the bill is due. For instance, if it's September and you have $600 due for car insurance at the beginning of Dec, you will want to save $100 for car insurance each payday instead of $50. Then after that first bill is paid and you're back on a regular schedule, you go back down to saving $50/month. I have had to adjust my savings several times because things changed. For instance, one year an excellent vacation opportunity came up that cost $300 more than I would have at the time of the trip. I had 6 paydays until the trip, so I saved an extra $50 per payday until after the trip, and then went back to my normal amount.

I just lost my job, and that freedom account takes up a lot of my money each month! What do I do?
I have gone through this myself. What I did while I was on unemployment is stop funding the optional categories in my freedom account like gifts or vacation, but still funded the mandatory things like renter's insurance and car insurance. This reduced the amount of money I had to divert, but did not put me at risk of having a car insurance lapse.

This message has gotten very long, but I hope it has helped some people. Anyone who has questions can feel free to email me or post the message in this thread!


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