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!”
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!
How Does It Work?
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.
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
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.