What Is The Best Way to Transition from Monthly to Semi or Annual Payments?
Afternoon fellow YNABer's,
I was wondering if anyone had any thoughts on how to best make a switch from making monthly payments to making either Semi or Annual payments for things like my car insurance, Amazon Books and such. I know the principle is to divide say a $300 semi-annual insurance payment into $50.00 a month so that when it comes around I have the funds. However what is the best way to have the $300 to make the starting payment? As I see it I have two choices, cut things to the bone and come up with the first payment then save or make monthly payments and double or triple the $50.00 I would save for a semi-annual payment and after a few months switch to semi-annual. Is there another way?
Tax refunds are not an option, no savings, 401K or anything like that to dip into, I am disabled and on a fixed income so no chance to pick up OT and I have nothing that I can sell to come up with the funds. Those are standard suggestions I have heard others make in different forums. I was just wondering if there was a trick that I was missing.
I'd love to hear what others have to say, but I'm not sure there is a shortcut here, considering there's not cash tucked away anywhere.
I'd think about ways you could be cutting expenses this month (ie. eating out, entertainment, or whatever you might consider "luxuries") and see if there's enough for the up front payment. If it's something like insurance, it needs to go out, so you may have to just budget that "big rock" first and then with whatever is left over To be Budgeted you can align your money to the rest of your priorities!
The bright side here is that you might find some areas of your budget that you can begin to save on in the long run! For example, a while ago, I realized, "Hey, I don't need to be eating lunch out 3 times a week ($45/wk). If I just buy a quick & cheaper lunch at the grocery store that I can heat up, I can eat that instead ($12/wk)! I just saved a ton of money! I wonder if there's anything like that in your budget?
The way this is handled is just through what's called a "sinking fund". For instance, if you know you're going to need new tires on your car in two years, and you have estimated that you will need $300 for those tires, you will need to set aside $150 per year - or approximately $12.50 per month - into that sinking fund. When it comes time to change the tires on the car, the money is already set aside in the account, ready to do the job you gave it two years prior.
YNAB let's you set up goals right inside of a budget item. Set the amount and the deadline, then follow the guidance inside your budget screen to get to your goal on time. As for your particular case, you mentioned "doubling up" on your payments (as in, pay the monthly installment, then save an equal amount for the next 6-month installment). That's your best option, but on a fixed income, that could be difficult. Your other option is to just cut to the bare bones, but that can be uncomfortable.
You may actually be able to do a mix of these two. If you had more than one of these subscriptions currently going, you may consider putting one of them on hold for 6 months and saving that monthly installment for that term. Then you'd be ready to dump the lump sum onto the subscription. You will then be in a position to perpetually stay ahead of it, ready for the next lump sum payment 6 months down the road.
None of this works unless you tell your money what to do. Without a written plan, you'll spend all of your time wondering where your money went. The good news is that if you are using YNAB, you're doing just that. So keep up the good work!
I hope this helps. Best wishes!
The way I handle things like this, and just to generally get a little breathing room in my budget, is I budget the required amount for the monthly payment, plus a little. For example my city bills runs at a maximum of $175 per month and I budget that much every month. Most months it's less that that and in those months I build a little more of a buffer.
If you can, setting up a goal and budgeting so much a month is probably the best idea, as was suggested already.
My way takes a while to build up enough to move to semi annual or annual payments and it will get you there eventually.
Good luck finding a method that works for you.
Is this something you have to do by a certain time? Or is it something you'd like to do? If it's voluntary, I would start budgeting the extra 1/12th for the annualized cost to the category along with the monthly payment. By the end of a year you have the funds sitting there for an annual renewal, and you've transitioned.
I think that when interest rates go back up again, that the cost for paying monthly will be noticeably higher than yearly. This is how it was in the 80s when prime was in the high teens. You could save substantially by annual payments.
I am currently in the process of doing this. I have a few monthly payments and this is what I am doing to switch the annual. I started an "Annual Payments" category with a subcategory for each thing I want to pay annually.
For my car insurance which was 600+ for the year, I asked for a 3 month payment plan this year. That way it allowed me to pay for the annual now and then have 9 months to save for the next year. My monthly target right now is higher than it will be next year since my payments are split between 9 months instead of 12.
For my O365, I make my monthly payments and at the same time I am saving 108.88 (with Tax) divided by 12. It seems like it would take me 12 months before I have enough but what I do is I round up all my budgets (so 108.88/12 = 9.08 and I am saving 10 a month instead). If I have an extra $10 to spare I add it to that category as well. That way I can switch to annual sooner and when I do I will have an extra 10.88 a month. I can then start saving that for another annual payment.
I did this by setting the "category balance by date" goal amount in my "Car Insurance" category to the amount of my 6 months discounted premium, and the date to a year away when my payment was due. For the next year, I continued to pay my "by month" premium, and the year gap in what I wanted to save made putting that extra bit each month toward the total much easier.