Savings or Irregular Expenses
There is a difference between saving and setting money aside for irregular expenses. Irregular expenses are day to day living expenses that come up every year but might be completely unpredictable like car repairs or totally predictable like Christmas gifts and birthdays. Savings on the other hand is very specific for a particular goal, perhaps retirement or a big trip.
In my life I have lived through many, many Christmases and I have noticed a coupe of common things that seem to escape most people, myself included. For instance, miraculously perhaps, Christmas falls on exactly the same date, December 25th, every single year and that is exactly 365 days after the last one. Wow! Who knew? Not only that but I, like most of you reading this blog, don’t start buying gifts until at least the closing week of November.
And those pesky car repairs, if you drive a car you will need to replace wear parts such as brakes and mufflers as well as perform oil changes to keep your vehicle on the road. Clothing is another irregular expense, your fashion sense aside you will spend some money on clothes every single year.
I will take the liberty of assuming that each year you spend
$1,000 on Christmas and other gifts, another $1,000 on car repairs and
maintenance as well as a further $1,000 on clothing. So, the total required for irregular expenses
each year is $3,000/12 months = $250 per month.
In other words, you should retain at least $250 each month in your
operating (chequing) account to ensure at any given time you have the money to
pay for your irregular expenses and don’t need to resort to using credit for
what are everyday living expenses.
Hmmm, how’s that working out for you?
Now let’s differentiate that from your savings, your savings should not be retained in your chequing account they should be set aside in a special savings account that will generate interest to help you get to your goal(s) faster. Talk with a financial planner about putting savings into “creditor proof” investment vehicles such as RSPs and some pension and insurance products – they’re your assets, protect them.