Sentry Page Protection
How to Use a Peace of Mind Account for Budget Success
Peace of Mind Account (PoMA)
This bank account is where you deposit regular amounts to cover irregular expenses. We call this your Peace of Mind account because of the peace of mind that comes from knowing you can pay those bills when they arrive.
This bank account is where you deposit regular amounts to cover irregular expenses. We call this your Peace of Mind account because of the peace of mind that comes from knowing you can pay those bills when they arrive.
Have you ever tried to budget, only to find that it just won't work because of unexpected expenses?
Then you need a Peace of Mind account (we often refer to it as PoM) to help you not only budget for, but plan ahead for those unexpected, regular but irregular expenses.
What is a Peace of Mind Account?
One of the biggest challenges to staying on budget is dealing with all those little extra expenses that seem to pop up. The things like braces for Junior's teeth, or the lawn mower blowing up or new tyres for the car; not an emergency, but an irregular, sometimes unexpected, expense.
They happen to us all, and often are the main cause of budget blow-outs.
The problem is that these are expenses that fall outside our regular monthly expenses, so it can be easy to forget to include them in our budget.
A Peace of Mind account is the place where you plan for and budget for these regular irregular expenses. It is a separate account, not a part of your regular bill account or savings account.
So what type of expenses would you include in a Peace of Mind Account?
These expenses aren't emergencies, they shouldn't be paid from your emergency fund. But, often when they crop up, you use your credit card to cover them. And then you are right back on the debt treadmill, paying down debt instead of building savings.
A Peace of Mind account allows you to plan, budget and then save for these expenses by putting aside a little each month. Then, when you need to replace that lawn mower or washing machine, the money is sitting in your Peace of Mind account. You can confidently get what you need, secure in the knowledge that you can pay for it in cash and without resorting to credit.
Take your Platinum membership renewal for example. To renew your membership is $36.50 a year, or 10 cents a day, or 70 cents a week or $3.54 a month.
Depending on how you run your Spending Plan (weekly, fortnightly or monthly) you should have a category for your Platinum membership renewal and regularly put that amount aside in your Peace of Mind account.
Your membership renewal is a regular expense, therefore it should to be included in your Spending Plan so that when it's due you can pay it, without having to find the money. You've planned ahead and have the peace of mind of knowing that you can pay it when it's due.
The same principle that applies to all your regular expenses (like your membership renewal), also applies to those irregular expenses, the ones that are one-off or only happen every now and then, the ones that catch you off guard, and unless you've planned for them you need to find the money quickly, often resorting to credit (ouch!) - and there goes your peace of mind!
You're holding your own and the budget is working out. That is until, out of the blue, Murphy comes calling and you need to replace the fridge. Or Junior's orthodontia bill doubles due to the genetic over-bite you didn't know he had. Not a problem, that's what you kept your one and only credit card for. Problem solved.
Wrong! If you don't have the money to buy your new fridge (or pay the orthodontist) then you don't have the money to pay off the credit card bill at the end of the month and you are back on the debt cycle again. Unexpected expenses like these aren't really unexpected. You have always known that at some stage you would need to replace the fridge. Chances are you've known for a few years about Juniors upcoming braces ordeal. The problem was that you
didn't allow for this irregular expense in your Spending Plan.
The peace of mind you thought you had has gone. In its place is the stress you used to feel when you were trying to pay the bills at the end of the month.
What you need is a Peace of Mind Account. Your Peace of Mind Account is where you deposit regular amounts to cover irregular expenses.
Depositing regularly lets the balance build up so the when Murphy calls you can cover the expense without having to thaw out your credit card.
A Peace of Mind Account isn't complicated or hard to use. It does, however, give you a sense of security and that peace of mind I keep talking about.
I suggest that you open a separate account, either online or at your bank or credit union. Look for an account with low or no fees that allows you to transfer money between your existing accounts. As you are going to be building the balance up look for an account that pays interest.
Once you have your Peace of Mind Account set up sit for a few minutes and think of all the irregular expenses you have had or could possibly have:
If you have the information, jot down roughly how much each one was. While you're thinking and jotting make a list of all the other expenses you've had in the last year that weren't covered in your Spending Plan: family weddings, unexpected trips, school camps, birthdays, Christmas (yes, there are some who don't plan for this regular expense), crafts and hobbies etc.
Take your list and work out how much you need to add to the Peace of Mind account each week to be able to cover these expenses when they crop up. For example, your new fridge cost $1,200. You have a two year warranty on it, so hopefully you won't need to replace it for at least two years. To be able to replace the fridge when it expires you need to add $11.50 a week to the account ($1200 / 2 = 2 $600 / 52 = $11.54). School camps last year cost $478 so you'll
need to add $9.20 to the account each week to cover the cost.
It is essential that you track what's going in and out of this account and keep a record, so you'll know if you have the money to cover an irregular expense when it crops up. I use an exercise book with one item to a page. Each item is an irregular expense and it's page is ruled into columns: date, transaction, deposit, withdrawal and balance.
Then you need a Peace of Mind account (we often refer to it as PoM) to help you not only budget for, but plan ahead for those unexpected, regular but irregular expenses.
What is a Peace of Mind Account?
One of the biggest challenges to staying on budget is dealing with all those little extra expenses that seem to pop up. The things like braces for Junior's teeth, or the lawn mower blowing up or new tyres for the car; not an emergency, but an irregular, sometimes unexpected, expense.
They happen to us all, and often are the main cause of budget blow-outs.
The problem is that these are expenses that fall outside our regular monthly expenses, so it can be easy to forget to include them in our budget.
A Peace of Mind account is the place where you plan for and budget for these regular irregular expenses. It is a separate account, not a part of your regular bill account or savings account.
So what type of expenses would you include in a Peace of Mind Account?
- Orthodontia
- new appliances (washing machine, fridge, clothes dryer, dishwasher, microwave etc.)
- new furniture (lounge suite, carpeting, window furnishings etc.)
- new car
- driver's licences.
These expenses aren't emergencies, they shouldn't be paid from your emergency fund. But, often when they crop up, you use your credit card to cover them. And then you are right back on the debt treadmill, paying down debt instead of building savings.
A Peace of Mind account allows you to plan, budget and then save for these expenses by putting aside a little each month. Then, when you need to replace that lawn mower or washing machine, the money is sitting in your Peace of Mind account. You can confidently get what you need, secure in the knowledge that you can pay for it in cash and without resorting to credit.
Take your Platinum membership renewal for example. To renew your membership is $36.50 a year, or 10 cents a day, or 70 cents a week or $3.54 a month.
Depending on how you run your Spending Plan (weekly, fortnightly or monthly) you should have a category for your Platinum membership renewal and regularly put that amount aside in your Peace of Mind account.
Your membership renewal is a regular expense, therefore it should to be included in your Spending Plan so that when it's due you can pay it, without having to find the money. You've planned ahead and have the peace of mind of knowing that you can pay it when it's due.
The same principle that applies to all your regular expenses (like your membership renewal), also applies to those irregular expenses, the ones that are one-off or only happen every now and then, the ones that catch you off guard, and unless you've planned for them you need to find the money quickly, often resorting to credit (ouch!) - and there goes your peace of mind!
You're holding your own and the budget is working out. That is until, out of the blue, Murphy comes calling and you need to replace the fridge. Or Junior's orthodontia bill doubles due to the genetic over-bite you didn't know he had. Not a problem, that's what you kept your one and only credit card for. Problem solved.
Wrong! If you don't have the money to buy your new fridge (or pay the orthodontist) then you don't have the money to pay off the credit card bill at the end of the month and you are back on the debt cycle again. Unexpected expenses like these aren't really unexpected. You have always known that at some stage you would need to replace the fridge. Chances are you've known for a few years about Juniors upcoming braces ordeal. The problem was that you
didn't allow for this irregular expense in your Spending Plan.
The peace of mind you thought you had has gone. In its place is the stress you used to feel when you were trying to pay the bills at the end of the month.
What you need is a Peace of Mind Account. Your Peace of Mind Account is where you deposit regular amounts to cover irregular expenses.
Depositing regularly lets the balance build up so the when Murphy calls you can cover the expense without having to thaw out your credit card.
A Peace of Mind Account isn't complicated or hard to use. It does, however, give you a sense of security and that peace of mind I keep talking about.
I suggest that you open a separate account, either online or at your bank or credit union. Look for an account with low or no fees that allows you to transfer money between your existing accounts. As you are going to be building the balance up look for an account that pays interest.
Once you have your Peace of Mind Account set up sit for a few minutes and think of all the irregular expenses you have had or could possibly have:
- car repairs
- plumbing problems
- unexpected medical expenses
- replacing the washing machine or vacuum cleaner etc.
If you have the information, jot down roughly how much each one was. While you're thinking and jotting make a list of all the other expenses you've had in the last year that weren't covered in your Spending Plan: family weddings, unexpected trips, school camps, birthdays, Christmas (yes, there are some who don't plan for this regular expense), crafts and hobbies etc.
Take your list and work out how much you need to add to the Peace of Mind account each week to be able to cover these expenses when they crop up. For example, your new fridge cost $1,200. You have a two year warranty on it, so hopefully you won't need to replace it for at least two years. To be able to replace the fridge when it expires you need to add $11.50 a week to the account ($1200 / 2 = 2 $600 / 52 = $11.54). School camps last year cost $478 so you'll
need to add $9.20 to the account each week to cover the cost.
It is essential that you track what's going in and out of this account and keep a record, so you'll know if you have the money to cover an irregular expense when it crops up. I use an exercise book with one item to a page. Each item is an irregular expense and it's page is ruled into columns: date, transaction, deposit, withdrawal and balance.
Once you've set up your Peace of Mind account you need to treat it just as you would any other bill. You must make regular deposits into it for it to work. You'll also need to decide on limits for some of the items i.e. that new fridge. When you reach the limit for each item you can stop making deposits until next year. I suggest that you apply that money to your Emergency Fund to give it a boost.
Lastly, remember that this isn't a savings account or an Emergency Fund. This is a spending account. The money in this account is to be used to cover those irregular bills and give you peace of mind.
If you don't already have a Peace of Mind Account, start one, right now, this week. Start putting away the money you'll need to paint the house in 5 years or replace the dishwasher in two years or yes, even pay for the braces for Junior's teeth. Become smart about saving for your expenses and you won't ever have to resort to credit. You can do it!
Lastly, remember that this isn't a savings account or an Emergency Fund. This is a spending account. The money in this account is to be used to cover those irregular bills and give you peace of mind.
If you don't already have a Peace of Mind Account, start one, right now, this week. Start putting away the money you'll need to paint the house in 5 years or replace the dishwasher in two years or yes, even pay for the braces for Junior's teeth. Become smart about saving for your expenses and you won't ever have to resort to credit. You can do it!