Hi all. I am currently preparing for a decline in my net worth.
It’s nothing bad and I have been getting ready for this drop in net worth since January.
This is part of the financial independence plan that I set out a couple of months ago.
I have two of my biggest bills that will hit for the month of October. Home insurance over $2300 and Health insurance which is about $3200.
Yes they are massive bills that I could pay each month but I prefer that money to sit in my account and offset my mortgage interest for the year.
Having the money sit in an offset account means that I will achieve my financial independence more quickly.
In fact my home and health insurance bills are not the only bills I do this for. I place a set weekly amount (in my case $405 per week, yours will be different) into what I call a “True Expenses” account.
What are true expenses?
True expenses are all those that you must pay throughout the year or it will effect a good or service you require.
Now, true expenses will differ from one person to another but everybody has them.
For example – I always cash-flow my haircuts because for me it costs around $28 and they are so intermittent that I can use part of my spending budget to cover them. However, my mother goes to the hair dressers every 6 weeks and pays approximately $250 each time she goes therefore she felt that she should ‘save’ the extra money and isolate it away from her usual spending so that the money was always there when the 6 weeks rolled around.
Other than quirky personal expenses like hair styling most other expenses will be similar.
Here are some examples to get you started –
Registrations and Insurances
- Home Insurance
- Health Insurance
- Vehicle Registration
- Vehicle Insurance
- Animal Registration
- Bank Fees
- Roadside Assistance
The above should help get you started. You may have more or less but you will have some unfortunately it is something that we can’t avoid 😉
I even have allocated Christmas in my true expenses because it is an expense that I can’t avoid…. unless I am a scrooge 😉
What’s the cost?
To get how much you will have to put into your true expenses account is really easy! simply just find your yearly cost for the expense and divide it by 52 weeks.
eg. My water bill comes in every quarter and in approximately $530 each time.
$530 X 4 quarters in one year = $2120 per year.
Now we simply divide by 52 weeks to get our weekly cost.
$2120 / 52 weeks = $40.77
I always round up. So I would allocate $41.00 to my true expenses account for water.
So just repeat this process for every true expense that you would like to allocate money to each month.
When the bills come around all you need to do is check that you are still allocating enough and pay the bill from your true expenses account.
You have to make sure that you DO NOT touch the money for anything else other than the true expenses that you are saving for. Otherwise when the bills come around you will not have the money you need to pay them.
The peace of mind is amazing!!
Think about it…. I have $5500 worth of bills (true expenses) in one month and I am not even phased about it.
This system of having a “true expenses” account is something that I only started last year and I have seen the benefits throughout this year. I will be continuing with this account.
How do I start?
When starting out you may have to top up your account with some extra funds until you have about $2000 in the account acting as a buffer until you hit your first year.
An example – Say I have just started my true expenses account and only have $400 dollars saved. I then get an electricity bill for $500. I would then take an extra $100 from my allocated spendings to put towards the bill.
You will find that once you have a balance of about $2000 you will not have continue to add because all of your bills will be due at different times of the year.
Once you have been transferring to your true expenses account for about a year you will find that you will have enough money in the account to support all of your true expenses as they become due throughout the year.
Even though this is a “set an forget” method, I still recommend that you do the following each time a true expense bill arrives
- Check that you have not been over charged
- Make sure that the transfer allocation is still correct
- Update your true expense spread sheet as necessary
Here is an example of my true expense spread sheet –
You can see that my weekly transfer to my true expenses account is $403.94. So I round up to $405 per week.
Take note that my true expenses DO NOT include the “Spending” section of the spread sheet. I like to keep track of how much I spend because I use this amount to budget my weekly spendings.
By working out your “True Expenses” you are able to see how much you actually need throughout the year.
After all my years of budgeting this has to be one of the easiest and most effective ways to manage my bills and I highly recommend that you give it a try if you are struggling to keep up with your true expenses.
Win at money with me,