One stressor of the holiday season is its demands on our money. Sometimes it seems like the needs for money just keep coming in, causing fear and stress about how things will get paid. Or worse, the purchases get put onto a credit card to be dealt with later. Ironically, people lament each year that there must be a better way.

There is. And in addition to lowering your financial holiday stress, it can also save you money. Holiday expenses, like other non-monthly recurring expenses, are something we should accrue for.

We tend to accrue for some monthly expenses without thought. Our mortgage or rent payments tend to be more than we can handle from one paycheck, so we allocate a portion of a couple of checks to cover this larger bill. If we didn’t, we might have trouble paying the rent or mortgage.

To accrue for an expense, you simply save a portion of that expense in advance, building up so that the funds are available when the expense is due.

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The Logistics of Accruing for Expenses

Holiday expenses are a great example of an expense for which people should accrue. You know the holidays are coming. They do so each year without fail. You can make a pretty good estimate of what you will be spending in advance.

Those are your two key ingredients: a reasonable estimate of the expense and a time when the funds will be needed.

Your spending plan number should include any holiday expenses you might incur (such as gifts, food, travel expenses) that you wouldn’t want to just absorb into your regular budget. If you mail three holiday cards each year, you don’t need to make that part of your spending plan. However, if you mail 300 cards each year, you probably should.

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So let’s say you plan on spending about $600 each year for the holidays. To have that $600 available for the holidays, you would need to allocate $50 per month for 12 months. If you’re paid twice a month, that would be $25 per payday ($600 divided by 24 payments). If you’re paid weekly, you’d need to save $11.54 each week ($600 divided by 52 weeks).

Having the money available without having to worry about how you’re going to pay for things will be a great stress reliever. Having a spending plan will help keep you from going over budget. And not charging expenses will save you interest expenses or other costs of using credit.

It’s a win-win. And not just for holiday expenses. 

Other Expenses That an Accrual Account Can Help With

Auto insurance policies are usually for a six-month period. The companies will generally let you pay monthly — for a fee. It typically costs you a few more bucks a month for this convenience. And that’s an expense you really don’t need to pay.

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If you build up the cost of your six-month policy in advance in your accrual account, then you avoid paying the insurance company for the convenience of monthly payments.

It’s a choice of giving them that money or keeping it for yourself.

The same with renters or homeowner’s insurance; you pay the insurance company for the convenience of making your payments on a monthly basis. These are expenses for which you can accrue and save yourself some money.

Real estate taxes are another. They come due periodically and are usually way too big to pay out of one paycheck. You really need to have the money set aside. If you don’t have it set aside, you may incur late fees or interest expenses as you borrow money to pay for an expense that wasn’t unexpected.

Accruing for Purchases

There are some things for which people are likely to think of accruing. Many people either accrue for vacation expenses or at least think about doing it. And vacation is a time to relax and recharge — not a time to worry about how you’re going to pay for that relaxation. But accrual works for even larger expenses as well.

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Car purchases should be accrued for. At least the down payment should be; ideally, the whole purchase should be saved for in advance. If you saved in advance for your car purchases you wouldn’t have a car payment, you’d save the cost of interest on your car loan, and you’d free up the car-payment money from the budget to use to save for the next car. In the long run, it saves you a lot of money and a lot of stress about making payments.

Living on a Fixed Income

Accruing for expenses is essential if you live on a fixed income. It’s easy to think this idea is great for those wealthy enough to be able to save in advance, but an accrual account and system are essential for those on lower or fixed incomes. This is the reality of many retirees. They need to have a good accrual system.

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If you live on a fixed income, you know how difficult it can be to deal with bigger bills when they come due. It may be impossible to pay some bills without resorting to credit with its exorbitant costs. Transitioning to using accruals can be difficult, but ultimately it makes things much easier.

Transitioning to an Accrual System

The actual expenses of things are generally the same when you accrue for them. Your savings come from not paying for the privilege of making monthly payments and from not having to borrow money to pay bills. Which is what using credit for expenses really is: borrowing money to pay bills.

But when you accrue for expenses, you are paying the cost in advance — not easy to do when things are tight. You’ll need a plan.

You may want to use a separate bank account for your accruals. Have a portion of each paycheck go into the account to cover those expenses you are accruing for, and have those bills paid automatically out of that account. Nice and simple.

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To transition to an accrual system begin with one or two expenses. Start small and work your way up: Consider the holidays. Rather than allowing next year’s holidays to knock your budget for a loop and cause you stress and interest payments, begin to save this month for next year’s holidays. Then you’ll have the money when they come around. And something else will also happen.

Your budget won’t get all thrown out of whack. You won’t have new credit card bills to absorb into the new year’s budget. You won’t have the self-induced financial havoc of not having planned in advance for an expected expense.

And with that comes opportunity. With that comes the opportunity to continue to creating order from what was chaos. You can continue to save for the following holiday season but also begin to accrue for another expense.

The Bottom Line on Accrual Accounts

Accruing for expenses saves you money. As you save money by accruing for one expense it makes it easier to accrue for the next. And so on. There’s a lot of money wasted paying for the convenience of monthly payments and on interest from not having your own funds available. You don’t need to fall victim to these unnecessary costs any longer.