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Setting up an Escrow Account?

March 29th, 2009 at 08:01 am

One of the tips I've picked up from reading all the blogs here is the idea of an Escrow account for expenses that aren't on a monthly basis. I think I first saw this on Creditcardfree's blog, but I remember reading about this idea on other people's blogs as well.

These non-monthly expenses are a real problem for me, because I forget about them until they are due. Then I have to find $500 for the car insurance, and since it's not an expense I am expecting, it has to come from money that was meant for savings. I think if I tucked this money away in a separate account every month, then I would have it when I needed it, and I would actually spend less in the previous months because the Escrow money wouldn't be available to spend on something else. So I'm going to give it a try, starting in April.

One question, though -- since I'm jumping into an Escrow account mid-way between all of these expenses, should I try to put extra in now so that I have the full amount available when the big bill comes due, or should I just put away the monthly amount for now, and pay the extra out of savings the first time the bill comes due? Does this question even make sense?

11 Responses to “Setting up an Escrow Account?”

  1. Thrifty Ray Says:

    Your question makes sense. I would do what makes the most sense to you because either way, the end result is the same. I have had one of these accounts for years and I would be lost without it. Unfortunately, the first year I had mine, I did not have any savings to pull from, so the extra had to go on Credit...but now I am always covered. Actually, I learned about this technique in a book by Mary Hunt and she coined the name of the account the "freedom Account". Good luck on your savings journey!

  2. Ima saver Says:

    I have been doing this method for about 40 years. I take all of my once or twice a year expenses and figure out how much I have to take out of each paycheck each week. Mine include car insurance (for 6 cars)twice a year (each,) house insurance, property tax and car tags once a year. I have to put away $175 week. Once you catch up the first year, you will never get behind again.

  3. asmom Says:

    I've been doing this for years as well. It really helps reduce the bite of auto insurance payments and yearly car tag fees by saving up for it monthly in a separate account. I would go ahead and play catch-up and put the extra away for now although as Ray stated, you'll come out the same in the end.

  4. asmom Says:

    Oh forgot to add, ING accounts are perfect for this purpose...they're easy to transfer to and from and the interest rate doesn't really matter for this purpose. Plus it's easy to set up multiple accounts for the different buckets.

  5. KellyB Says:

    I started this account too about 3 years ago. It is the best thing I ever did. I was the same way, always being "surprised" by bills I should have known were coming up. So I just set up an excel spreadsheet and listed the months and what extra expenses were due. Just try to put as much as you can in it the first year, and after that you're all set! Good Luck!

  6. creditcardfree Says:

    If you have the money to make up the difference, I would put that aside now and then continue monthly amounts. This method works the best!

    However, if you just start the monthly payments and then you are short for an expense, simply add money from your current budget, or apply to a credit card. Look for ways to find extra dollars to start getting this account to the balance it needs to be. Rebates, coins, aluminum cans, garage sale, ebay and craigslist sales are all great places to start.

  7. L Saver Says:

    Thanks, everyone, for your advice. I think I'll start putting away the monthly payments in April, and try to add a little bit extra each month for the first year. I'm excited to try this out -- hopefully it will work as well for me as it has for each of you!

  8. Aleta Says:

    i've also been doing this for years as well. In the beginning I was like you and didn't have enough for the full 6 month bill due. I had to start looking for extra money to shore up the account. I now can fund all of the accounts and have them paid by the time the bill is due. I also do this for the Xmas and vacation fund as well. I have the vacation money paid up when I need it.

    It would be good to get the money in a high interest bearing account. The interest adds up. I have found that I have been able to take advantage of 3 and 6 month CD's because of the different funds that I have in this account.

    Once you set it up and fund it monthly, you will love it.

  9. momsfirststep Says:

    I've had an escrow account for years now and it has really helped me keep on top of my finances. I add up all the expenses that I want to include in the account which is any expense that I don't pay on a monthly basis (car ins, homeowners ins, property taxes, gym membership, Disney season passes, liability ins) and divide by the number of pay periods. I have a financial allotment for the amount taken out of my paycheck every pay period. Everytime an expense goes up (property taxes for example), I adjust my allotment. I was tired of having a heart attack whenever a big expense came up. By taking it out of your paycheck so you don't see it, you never really think the money is yours to spend. In reality, the money is already spent (property taxes, homeowners and car insurance) you just didn't pay it yet. Do you know what I mean?

    As for your question, do the best you can knowing that you will be short for the first year. Start the allotment and make up the rest from your budget, savings, etc. whatever you would normally use to pay the expenses. I keep the money in an interest bearing account and keep the interest in the account b/c for some expenses you may come up short even with the account depending on when the expense is due. But at least you will have some of the money saved up. Good luck. You'll love it.

  10. monkeymama Says:

    Either way will work.

    I've always had an "escrow" account of sorts. I can't imagine life without one. Big Grin

  11. debtfreeme Says:

    I have done this since i was 18 and love it! It makes life so simple.

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