Do You Need a Holding Account?
By Kevin Gibbons
When we prepare Spending Plans for our Cash Flow clients, we group expenses in several different ways. One of the ways we separate them is Monthly versus Intermittent. Monthly expenses are pretty straightforward. They are the expenses that predictably recur each month, like your rent or mortgage, groceries, utilities, gas or transit pass.
Intermittent expenses, like the name implies, occur irregularly, maybe once a quarter or once a year. These are things like your car insurance (if you don’t pay it every month), car registration, vacations, seasonal sports activities or hobbies, and holiday gift giving. It has been our experience that this is where many people struggle because these expenses aren’t in the forefront of their minds and often catch them by surprise when they come up.
Part of our Spending Plan process is recognizing and planning for these expenses, so you have the money ready when they do occur. One of the best ways to plan for these expenses is to have one or more holding accounts where you collect the funds over time to pay these expenses. When I was growing up, my parents’ bank had something called a “Christmas Club.” They could set up a monthly deposit of $20/month into this account, so that by December, they had $240 set aside for holiday spending. (This was a long time ago, when $240 would more than cover most holiday expenses! It was also before automated banking, so they actually had a separate passbook for the account and made their monthly deposits in person at the bank.)
You can do the same thing much more easily with Internet Banking and Auto-deposit. Set up one or more dedicated savings accounts with your bank (many banks will let you set up some number of linked accounts for no extra fees.) Automatically deposit funds in these accounts to be used for paying your Intermittent Expenses. You don’t need separate accounts for every single expense. You can group them into logical categories (like “Automobile” for all car registration, insurance, maintenance and repair expenses, “Travel” for all your traveling and vacation expenses, “Seasonal Entertainment” to cover all the concerts, sporting events etc. for the year, and so on.)
Intermittent expenses can catch you by surprise, causing you to dip into your Emergency Fund or put them on your credit cards to pay for them. Setting up and funding Holding Accounts ahead of time to secure the money to pay for these expenses can keep you off the vicious roller coaster of accumulating debt, paying it off and then building it back up again.
Kevin Gibbons is a Cash Flow Planning Expert, the Vice President of The Savvy Life and co-author of the international bestseller Living The Savvy Life. For more than a decade, Kevin and Savvy Life Founder Melissa Tosetti have worked with over 850 individuals and families to create Spending Plans.
To learn about how Kevin and Melissa work with clients to create Spending Plans, visit The Savvy Life’s Home Page. If you’d like to learn about how they work with financial advisors and their clients visit: The Savvy Life Advisor’s Page
