Escrow Your Cashflow

Most people are familiar with the idea of a mortgage escrow – it’s when your mortgage company receives more than the principal and interest each month to take responsibility of paying for other home expenses, such as property taxes and home insurance (while conveniently not paying you for the privilege of doing so).

While I think that responsible savers can (and maybe should) un-escrow their mortgages, the concept of escrowing is important in other areas of our money.

You can do this with a boatload of typical expenses – pretty much anything that’s not a regular monthly payment. Auto insurance, vacations/family trips, life insurance, home projects, future car purchases, and the aforementioned property taxes and home insurance as a few top of mind ideas.

The concept is you take what your annual/quarterly expense will be – say, for easy math, a $1,200 auto insurance bill due once a year. Then divide the annual bill by 12 months – in our example, $100/month. And then automatically sweep this $100 from your checking account into a designated savings account every month.

By doing this, when that annual $1,200 bill comes around, you’ve got the funds to immediately pay it without breaking your budget or tapping other funds, like an emergency fund.

There are psychological reasons for doing this (mental peace of mind), but with interest rates creeping back up there’s also economic reason to do so as well. It’s simple, and once it’s set up once, it’s on autopilot – leaving you more time to enjoy other things.

What I’ve done is set up separate accounts for each one of these at an online bank, each with its own account number. This way money from my checking account is automatically flowing into each one of these automatically each month, and when the bill comes due I can pay it directly from the account.