How to Avoid Cash Flow Hiccups

If you’ve ever gone into credit card debt buying gifts for the holidays, or if you've ever broken your budget trying to pay for your pet’s vet checkups, a revolving savings account may be just what you need.

Written by Caish Echols AFC®, CFP® / August 4, 2022

Quick Bites

  • A revolving savings account helps spread large cash flow events evenly throughout the year.
  • This account can be used to pay for birthdays, holidays, annual fees and memberships, etc.
  • Having a revolving savings plan gives you permission to spend the amounts you want on the things you want.

When I was younger, I couldn’t sleep the night before my birthday or Christmas. I was so excited to see what was in store the next day and what gift I might receive. Now that the roles have changed, and I’m not a little kid, those holidays can feel more stressful than exciting because I’m the one footing the bill. Can you relate?

What’s even worse is that birthdays and holidays don’t fit into regular monthly budgeting. We know they are going to come up every year, but it seems difficult to fit them into our spending plans. How does one pay for non-monthly expected expenses without later digging into emergency savings, throwing off other savings goals, or going into credit card debt? The answer: A revolving savings account.

Inside this article

  1. Revolving savings account
  2. Why do I need one?
  3. How do I start?
  4. Where can I set one up?

What is a revolving savings account?

A revolving savings account is an account specifically set aside for expenses that happen yearly, but less frequently than monthly. It’s an account that allows you to save for things that don’t fall into your regular monthly budget, but aren’t emergencies either like holidays, anniversaries, insurance premiums, your Amazon Prime membership, etc. Some people also refer to this savings account as a “sinking fund.”

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The overall idea is to add up how much all these expenses cost you each year and then divide that big number by twelve giving you a monthly expense amount. From there, you build that cost into your regular monthly budget, evening out your cash flow throughout the year.

Why do I need one?

As I’ve helped people create and stick to a budget, I’ve found that these revolving expenses are often the make-or-break point in the success of these individual’s spending plans. Normally I see two scenarios when it comes to revolving expenses.

First, people feel so overwhelmed trying to plan for these infrequent expenses that they don’t even bother budgeting. They tell me things like, “My expenses are just so unpredictable, it’s hard to budget month-to-month,” or “I’ve tried budgeting and no matter what I do, it just doesn’t work for me.”

Second, I see people who start budgeting and do a great job managing their monthly cash flow, but then a non-monthly expense comes up and throws them off. In order to try and stay on track with their spending plan, they end up pulling from emergency savings, putting the expense on a credit card or forgoing a monthly savings contribution in order to cover the revolving expense.

Both alternatives result in abandoning spending plans and slowing financial progress.

On the flip side, using a revolving savings account makes the opposite true. It can help you be more successful with your budget, stick to your savings plan, and avoid unnecessary credit card debt. It can also give you permission to spend on the things you want.

Take me for example. Each year my spouse and I like to take a $1,000 trip for our anniversary. Before we had a revolving savings plan, we would feel too broke to go. We would fight and stress about money and miss out on time together. But once we built our annual trip into our revolving savings, all of that went away. Now, we have $1,000 there each year and feel completely free to spend it on a fun trip.

By building non-monthly costs into your monthly budget, you’ll also get rid of spending guilt for holidays or any special event that you want to spend on.

How do I start?

The best place to begin when deciding to use a revolving savings account is by creating a revolving expense calendar. Here’s how to create your own.

Using Google Sheets or Excel, or a pen and paper, start by listing out each month, January to December, from left to right across the first row.

  • Then, starting with the first column, list out each of the different expense categories for the year. Think of things like:

  • Annual memberships or subscriptions (like Amazon Prime)

  • Holidays (including Mothers/Fathers day, Thanksgiving, etc.)

  • Birthdays

  • Anniversary/Valentine’s Day

  • Non-monthly insurance premiums (vehicle insurance, life insurance, pet insurance, etc.)

  • Credit card annual fees

  • Car maintenance (like oil changes, tires, batteries, etc.)

  • Vehicle registration/ taxes

  • Non-monthly healthcare or dental costs (like prescriptions, copays, contacts, etc.)

  • Veterinarian check-ups

  • Seasonal sport/extracurricular costs for your child

  • Charitable donations

Once you have each of the expense categories outlined, go through each month and write out the cost of each expense in the month that it occurs. For example, if I want to spend $2,000 at Christmas, I’d put $2,000 in the cell under December and across from “Holidays.” Complete this process until you’ve gone through every month and expense.

From there, add up the total cost of all of the expenses you wrote out (you can create a formula to do this if you’re using Sheets or Excel).

Then, divide that number by 12.

This will give you the amount you need to save each month so that you can afford each of the different expenses you outlined in the calendar.

Once you have your revolving savings expenses lined out and the amount you need to save each month, put that amount into your monthly spending plan.

Where can I set one up?

A revolving savings account doesn’t require you to open any special type of account. You can just use a regular checking or savings account wherever you bank. Because savings accounts are limited to six withdrawals per month, it may make more sense to put your revolving savings in a checking account depending on how many revolving expenses you have each month.

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Regardless of whether you use a checking or savings account, just make sure that it’s separate from your regular checking and savings accounts. You’ll want to have that money set aside for the expenses and amounts you decided on.

Once you’ve opened an account, set up an automatic contribution from your regular checking account into your revolving savings. Now, you’re ready to start saving for those non-monthly expenses without breaking your budget!

About the Author

Caish Echols

Caish Echols AFC®, CFP®

Caish has worked in the financial planning industry for over 5 years, including working for one of the pioneer financial planners who brought fee-only financial advice to Millennials. She loves making the complexities of finance simple to understand and helping people follow their own paths.

Full bio

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