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The Freedom Account

Before the advent of easy credit, people had no choice but to anticipate. They had to save up for everything because there was no alternative. Anticipating expenses and being prepared for those rainy days was the only way to deal with the reality of running out of money. Whether you had a lot or only a little, you never spent all of it. Anticipation meant survival.
— Mary Hunt, Debt-Proof Living

Readers who pick up Mary Hunt's book Debt-Proof Living will find a comprehensive guide to improving their personal finances. Focusing largely on consumer credit issues and the use (misuse!) of credit cards, Debt-Proof Living provides a highly-detailed look at how families and individuals slowly find themselves overtaken by their financial burdens — which most often stems from their inappropriate use of credit and credit cards — and how they can go about cleaning up their respective money messes.

Debt-Proof Living (formerly The Cheapskate Monthly), urges that each household create and manage what she refers to as a "Freedom Account." Many people, she writes, get themselves into credit trouble not by splurging on spur-of-the-moment fun purchases, but by finding themselves unable to pay for those big-ticket, necessary expenditures which Life drops on them from time to time.

Included in this category might be items such as car repairs (usually expensive; almost always unexpected), vacations (very expensive, but also very plannable), medical bills (always expensive; almost always unexpected), six- or twelve-month insurance premiums, insurance deductibles, work clothes, Christmas gifts, and other items like these. You know all these expenses are going to show up sooner or later; with many of them, you just don't know when.   But just because an expense isn't in front of you right now doesn't mean it's optional.

And what about expenses like Christmas? That one hits at the same time each year. (And it probably gets more expensive every year, too.) Yet people simply do not take the time to build up the necessary funds beforehand. Thus, December rolls around, and out come the handy credit cards. Next July comes through ... you're still paying for last December.

Freedom Account: Your Financial Holding Bin

ExcelGeek's Freedom Account SpreadsheetThink of the Freedom Account as a sort of holding bin. You deposit small sums into it each month because you are thinking ahead: You're anticipating bigger, specific expenses down the road.

In a perfect world, your Freedom Account provides for these bills entirely. But our world isn't perfect. At the very least, such an account would help to alleviate the immediate financial strain imposed by irregular expenses such as those above. And that means those oh-so-vital credit cards might never have to come out of your wallet or purse.

As as example of just when and how a Freedom Account might be useful in real life, my article "When Murphy Comes Calling" describes just that. Take a moment or two to read it sometime.

Starting Your Freedom Account

Very few people have knowledge of their true expenses. Because they do not consider intermittent and irregular expenses as regular monthly obligations, their expenses turn into emergencies and financial crises.
— Mary Hunt

There is certainly nothing complicated about putting a Freedom Account into action. Some of us, in fact, do it without even knowing we're doing it! (And you twelve people know who you are.)

In short, Ms. Hunt's Freedom Account functions like this:

1. Open a separate account, either online or at your bank or credit union.

Ideally, this would be a no- or low-fee account. As long as you already have an established checking account somewhere, then accounts from Emigrant Direct and Capital One 360 work like a charm as Freedom Accounts, since you can transfer money back and forth from your existing accounts with a few keystrokes. If you're setting up a separate checking account for as your Freedom Account, remember that since you'll definitely be paying expenses from it, you'll want to make sure its check-writing privileges are up to snuff. And be sure that making deposits into this account is as easy as possible. (The ability to set up electronic and/or automatic deposits into it is generally a big plus. Again, Capital One 360 savings accounts fit this bill perfectly.)

2. Find and list your irregular, big-ticket expenses.

Some of these will come to mind immediately; others will probably require that you search back through a few checkbook registers, or scroll backward through your computer financial program, if you use one. What were the bills that caught you by surprise? What bills didn't surprise you, but still found you unprepared? Auto repairs? Property taxes? Insurance deductibles? Medical bills? Holiday and birthday gifts? Here's a list of some ideas:

Auto repairsClothingMedical billsChristmas
Insurance deductiblesVacationsProperty taxesLife insurance
BirthdaysAnniversariesAuto tagsAuto insurance
Home repairsRemodelingFurnitureHobbies

Now determine what dollar amounts you could set aside monthly to take care of each of these wallet-busting bills.   For example, your usual $500 Christmas gift-giving spree would be fully funded ahead of time by setting aside about $42 per month ($500 / 12 months = $42). If you spent $780 on automotive repairs, maintenance, and tags last year, you'll want to put aside at least $65 per month to cover them this year (you hope!).

3. Split your new bank account into separate subaccounts.

The trick with a Freedom Account is to think of this particular checking account as being divided into several subaccounts.   These subaccounts, though, aren't created by the bank. They're created by you and your financial needs. Each subaccount will be set up to cover a different set of the irregular expenses you listed above:   one subaccount could handle auto repairs, one could cover Christmas expenses, one clothing, or medical — just whatever items you need.

4. Set up your subaccount tracking system.

Tracking the inflows, outflows, and balances in your subaccounts is vital. This can be done with either (1) a notebook and ruled paper, (2) a notebook and a few printed copies of this Freedom Account chart (HTML or PDF format), or (3) an Excel spreadsheet like one of these:

ExcelGeek's FA Spreadsheet     (Product Review & Info)

IYM Freedom Account (10 subaccounts)     89kb     Macros:   No.

IYM Freedom Account (25 subaccounts)     185kb     Macros:   No.

If you're using notebook paper or the printed HTML chart, then each subaccount gets its own sheet.   If you're using the Excel spreadsheet, then each subaccount gets its own separate worksheet. (Before you fire up our spreadsheets, however, please read our disclaimer.)

5. Begin funding your subaccounts.

Treat your Freedom Account just like all your other monthly bills. This means you'll deposit a set amount of money into it each and every month. As you do this, use your recordkeeping system to divide that deposited money into the proportions you've chosen for each of your subaccounts. You'll also want to decide on "ceilings" for each subaccount; that is, the maximum dollar amount you wish to set aside in each one. Generally this would equate to a full year's requirement for each of your irregular expenses.

6. When your Freedom Account expenses happen, pay them!

This is what you've been saving that money for! Makes sense, doesn't it?

A Few More Freedom Account Guidelines

  • This is a spending account, not a savings account.   The money in it is targeted for specific future expenses. Don't let the balances build up ad infinitum. Determine your ceilings (maximum necessary balances) for each particular subaccount and respect them. When that balance is reached, don't deposit any further money into that subaccount until you've made a withdrawal. (Once my Christmas subaccount hits $500, for instance, I don't make any further deposits until some of that money gets used.)

  • Don't hesitate to use your account.   Don't let yourself feel guilty about using funds from your Freedom Account. When those big expenses pop up, allow your planning and saving to do what it was meant to do. Spend it for the purposes — even minor ones — that you intended.

  • Try starting out with a minimum number of subaccounts.   Getting your Freedom Account started can be tough early on, as you're probably not used to setting aside money like this on a monthly basis.   So limit your subaccounts to the essentials. If you have to curb your spending in other areas, do so. Remember that those big expenses are going to find you again this year — just as they did last year — whether you're prepared or not. You might as well be prepared (or maybe just more prepared) this time.

  • Take your account seriously. When it's time to make your Freedom Account deposits, DO IT. There will be months where you'll be tempted to skip your contributions. Just keep in mind that when your big-ticket expenses come along, they won't be optional. Article End

The FA in YNAB!

One of the great things about Jesse Mecham's You Need a Budget software is that you can incorporate your Freedom Account saving right into your YNAB monthly spending plan.

Once you've determined what your Freedom Account subaccounts will be, just enter them as you would any other monthly expense in your YNAB software. The program tracks your "subaccount" balances automatically. There's no other tracking software to worry about!

Check out my latest YNAB review for more info!