Peak-and-Valley Money Management

Your tax refund arrived. You got a bonus at work. Your savings account just paid a dividend. This month you’ve got extra cash, so you can go out and splurge!

But wait. What about the months when you have extra expenses when Christmas rolls around or when the car insurance is due? How will you come up with the money when your budget is already tight?

There is a way to get rid of these peaks and valleys between expenses and income if you manage your finances instead of letting them manage you. By identifying peak expense periods, you can match them with peak income periods and smooth out those ups and downs.

Before you can control peak expenses and incomes, you have to identify—as much as possible—when they will come. Possible sources of peak income might include dividends, income tax returns, extra checks, part-time work, pay from a second job or free-lancing, or bonuses. Peak expenses you can foresee might include car or life insurance, vacations, taxes, Christmas, school clothes, and car licenses.

Begin by listing each of your sources of peak income, the months you will receive extra income, and the approximate amounts. Then list each foreseeable peak expense, the month it is due, the estimated amount of the bill, and the amount you will need to set aside each month in order to pay it.

For example, you know that Christmas is coming next year. You decide you will spend $500. The money may be saved in a bulk sum from peak income, or in smaller amounts of money each month. To save $500, you must save $41.67 per month. Round it off to $42 for easy bookkeeping. If you get paid every two weeks (twenty-six pay periods per year), you will have to set aside $21 per paycheck to have the allotted money when Christmas comes.

After you’ve determined how much money you need to save, the next step is to find a place to keep your funds so that they are separate from your regular checking or savings account. Go to your bank or credit union and explain that you want to earmark specific funds for specific expenses and that you want the funds to build up to a predetermined amount by a certain date—and to earn interest in the meantime. Many institutions offer “set-aside” accounts that you can specify for different uses. Sometimes tellers are not even aware of such programs, so don’t be afraid to be persistent.

If you cannot find an institution with set-aside accounts, you can open several additional savings or checking accounts. Most banks will let you have as many as you like, providing you keep a minimum balance in each account. Other savings institutions offer Christmas clubs from which you can withdraw funds only during the last three months of the year. Many people use Christmas clubs to save money for property taxes and religious donations as well as Christmas expenses. You can also set up different accounts on paper. Or you might put money out of sight temporarily; for example, you might put your income tax return into a six-month certificate of deposit if you plan to use it to pay your property taxes in the fall.

The easiest way to make sure you set aside money is to use direct deposit. This means that your employer deposits your paycheck directly into your account. This way you never see the money until you need it. If your financial institution or employer doesn’t offer direct deposit, you must discipline yourself to make the necessary deposits each month.

How does peak income fit in? In order to make this money management strategy work, you must resist the urge to spend extra money when you get it. Instead, put it away to meet your peak expenses later on. You can put all the money from one source of peak income toward one bill, or you can divide it up among several.

This method requires working a year ahead, so plan carefully. But once you have your plan working, it will be easy.

Now, go set up those accounts!—Lyle E. Shamo, West Jordan, Utah