Why You Should Create an Accrual Account and How to Do It

by Contributor

For the longest time, my husband bugged me about creating accrual accounts, or sinking funds. I strongly resisted and told him accrual accounts were great for businesses but really not necessary for personal money management It’s just too complicated and requires too much work for a household of two. Then one evening when we were discussing our expenses for the following year, I told him I hated the mad scramble to find money for a big expense and I hated using our emergency fund or savings for it. His face lit up and he said, “And this my dear, is why we need accrual accounts!”

So what are accrual accounts?

Accrual expenses in general accounting are basically expenses that you know you will have to pay at a later time. You are usually accumulating cash for these future payments.

Accrual accounts in personal finance are very important because they help you prepare for large expenses later on so that you’re not “scrambling to find money” when the time comes. By creating accrual accounts, you are putting money away every month for each expense and when the time comes for you to go on that vacation, all you need to do is pull the money out of the accrual account to pay for it and there is no need to stress!

Here’s how it works:

1. Make a list of big expenses you expect to incur next year. Do you plan on sending your kids to summer camp? Perhaps you want to reward you and your spouse with a relaxing vacation. What about the family reunion? Or maybe you want to get your teeth whitened or need to upgrade to a plasma TV. Write them all down!

2. Decide how much to spend and when. Once you have your list of goals, put together a chart like the one below and decide how much each expense will cost you and what time of the year you plan on making the purchase.

3. Calculate monthly payments for each expense. I take the cost of the expense and divide it by the number of months I will have to contribute to that expense. For example, for Mike’s Wedding, to determine the amount I have to put in each month, I take the $200 and divide it by 3 months of payments because I will only be able to contribute to the accrual account in the months of January, February and March. This means I will need to put in $66.67 each month until April towards that expense.

4. Calculate total amount of money you need to put away for each month. Determining the amount of money that goes into your accrual account each month is a bit tricky and will need to be done manually. From January to March, you will be contributing to all of your expenses which will end up being $1231.22 a month. But once April comes, this changes because you are no longer contributing to Mike’s Wedding or Mom’s Birthday.

5. Sit back and feel good about being prepared. Once you have the plan in place, create an account with your bank and start depositing. I currently use sub-accounts at Capital One 360 because of their relatively high interest rates. In the meantime, create a chart that shows what the balance in your accrual account will be for each month. It gives you a better sense of security knowing how much is left in there and whether or not you are on track. Don’t forget to subtract the withdrawals from the balance.

You might end up with a small deficit due to rounding but that shouldn’t be a problem since you’ll be earning interest on your balances.

Accrual accounts are also great for helping you to determine what large expenses you’ll need to cut out. Maybe you can’t afford to go on that Hawaii trip after all and it’s a good thing to realize this before you book your tickets. Once you get the hang of using an accrual account to prepare for large expenses, you’ll never have to worry and wonder where you’re going to come up with enough money to pay them again!

Creating an accrual account with your bank. Some online banks such as Capital One 360 and Ally Bank allow users to create subaccounts within your main account. This is the perfect way to create accrual accounts for your specific needs.

This is a guest post written by Jayde Moss, a stay at home wife who manages the finances for her family and chronicles her efforts to become a millionaire. You can read about Jayde’s journey on Making Me a Millionaire.

Published or updated May 21, 2013.
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{ 8 comments… read them below or add one }

1 Jim

I use accruals for major items like tax (we have no PAYE here) and it avoids the nasty surprise of finding myself short of cash when these items come due.

It takes me about two minutes to update the accrual numbers in my spreadsheet each month.


2 Kacie

I do this for our insurance policies and it makes saving up for the annual payments painless!


3 Financial Samurai

I like this idea. However, is this an idea for those who don’t have the discipline to budget? Actually, isn’t this another word for “budget”?

Definitely seems like the right thing to do for most people.


4 Neal A. Deutsch, CFP

In a simplified way, an accrual account is similar to your grandparents or parent’s cookie jar or envelope system. In the “old day” when the breadwinner came homewith the weekly paycheck (yes, they got paid weekely, not bi-weekly!) Mom would usually split up the cash into the respective envelopes (rent, insurance, utilities, food, etc) and retrieve it when the particular bill was due. Fancy that- no computers or online banking.


5 Len Penzo

The Honeybee and I use this method too for our family’s personal finances. In fact, it’s a tried and true method that ensures financial discipline. We actually apply this to ensure we have enough money to meet all of the goals in our strategic (long-term, as in longer than one-year) spending plan.

Great post!

Len Penzo dot Com


6 NatalieMac

I’ve been using a system like this for any irregular expenses for about two years now, and it really works well.

I set up a monthly budget, but quickly realized that there were a lot of expenses that didn’t fit neatly into a monthly budget – car insurance every six months, rental insurance one a year, car registration once a year, birthday gifts sort of randomly throughout the year, holiday shopping, vacations, etc.

I created an annual budget for all the non-monthly expenses, divided the total by 12, and then put that amount away in a savings account each month. Now, when I have to do my holiday shopping or pay my car insurance, the money is always there and I don’t have to worry about being short one month because of an irregular expense.


7 Marcus

This is a great system and Ideal if you have enough income to cover all of your expenditures for all months. However; it gets complicated with you have to save for several items and the total is larger than you can save in any one month. For example.

Ok, Its Jan 1, 2010

Wedding to attend in March – 400 = (400/2 = 200)
New TV in July – 600 (600/6 = 100)
Xmas in Dec – 600 (600/11 = 55)
So for Jan & Feb i should save 355.

However, I can’t do that much.

Does anyone have a system (excel pref) to track and visualize this.

*I know I know its just a matter of setting up a timeline, but I love excel and am obcessed with tracking stuff like this.

I would love to be able to plan my entire year out and see it fit and come under budget.


8 Ryan

Marcus, You could break up your total expected expenses into 11 months, then contribute that much each month, taking what you need from the other accounts first, then repaying it after you make the purchase. For example, you will need $1,600 for these expenses, which comes to $145 per month. That won’t quite work for the March expense if you only count Jan/;Feb contributions, but depending on when in March the wedding is, you may have enough. If not, you may be able to contribute a little more than $145 per month, just to get your fund seeded for earlier expenses. After you have the expense, you just funnel new contributions to the other savings so you are covered for those expenses.


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