escrow ∣ noun ∣ es·crow ∣ \ˈes-ˌkrō\
Escrow is a financial arrangement whereby a third party holds funds in safe keeping pending the completion of a contract or other obligation
When we talk about escrow it usually has to do with real estate transaction. When a buyer hands over their money they want to ensure the seller doesn’t receive those funds until certain conditions are met and the transaction is completed. This could mean that the transaction is pending until an inspection can be done or the buyer confirms that they can obtain a mortgage for the purchase (if you read my post on buying your first home you probably already had your pre-approval letter 😉). The funds are deposited into an escrow account where an escrow officer is responsible for overseeing them until both parties agree that all conditions have been met and the funds can be released to finalize the transaction.
Today, the escrow officer in charge of your funds is your future self. And instead of setting these funds aside for a real estate purchase, we’re setting savings aside for lumpy purchases.
If you haven’t read my last post on budgeting, hop to it 🐰. Before we can get your escrow account all set up, I want you to have at least a rough idea on what your monthly and annual spending is. It doesn’t have to be perfect… your finances are a moving target! But we need to separate out those regular monthly expenses like rent, groceries, Netflix, etc. from items that aren’t so regular, but that we still need to plan for.
In my household, the lumpy items are:
- Gifts 🎁// We tend to spend more on gifts around the holidays and in the fall (we’ve got a strong Libra ⚖️ & Scorpio 🦂 contingency between my and Roberto’s family).
- Haircuts and hair color 💁🏽 // My hair color doesn’t happen every month and even then I alternate between root touch-ups and refreshing my balayage so the cost varies. (I see color queen Olivia Fadda… worth every penny)
- Big box stores 🛒 // We consider big box stores to be places like Costco and Target. We don’t visit every month, but when we do we’re normally stocking up on household items in bulk or doing seasonal spending on holiday decorations.
- Car registration & insurance 🚗// Once a year
- Property taxes 🏡// Twice a year
Once you figure out what those lumpy bumpy items are at your house we’re going to come up with an annual total and divide by twelve to figure out what we need to set aside each month to ensure those obligations are met. I’m a fan of setting up a separate checking or savings account to house these “escrow payments”. Take it a step further and automate your life by having either this portion of your paycheck direct deposited to your escrow account or setting up a monthly transfer so it all happens without you having to lift a finger.
Now that ‘contract or obligation’ that we’re waiting to be fulfilled? That would be spending in any of those lumpy categories that you’ve been setting money aside for. Gotta pay your car registration or go on a Costco run? No stress… you’re ready for this. Reimburse yourself out of your escrow account and keep chugging along with your regular monthly budget. Your future self will thank your past self for planning ahead!
How do you normally handle quarterly, bi-annual, or annual expenses?