Back in the day, we’d throw our money into the checking account and pay the bills as they came due. In a general kind of way, we knew that income exceeded outgo and so we could cover those big, semi-annual or annual expenses: homeowners insurance, taxes, my tuition. Right? Well…
We generally covered the bills, but the cost was stress. We’d pay a big chunk of change and feel dirt poor, worrying about unforeseen expenses and waiting eagerly for the next paycheck to plump up our bank account.
Enter the escrow.
An escrow account, usually required by a bank or mortgagee which holds the note on a home, collects a monthly amount which goes directly to pay for taxes and insurance. In this way, the bank ensures that the home is covered by hazard insurance and that the bank’s investment is not lost due to failure of the homeowner to pay taxes.
Now our mortgage does not include an escrow account for taxes and homeowners insurance. Our first item of escrow business—really a no-brainer once we remembered paying into an escrow account for mortgages in the past–was to set up our own escrow account for homeowners insurance and taxes. My bank allows me to set up an infinite number of “checking accounts,” so we took advantage of that feature and automated our payments into the escrow account. Voila! Peace of mind and paid bills.
But why stop there? Tuition is a recurring expense for me, so I started up a tuition account. We also have escrow “accounts” for saving for our next car and for taxes from my side gig income. Escrow accounts are a pathway to peace.
While our bank provides a tool for us to literally create escrow accounts, you may choose to do it differently. You could stash the money in a savings account and keep track of what you’re saving for via budget software or a spreadsheet. The important thing is to make sure that you’re saving bit by bit, consistently and effectively, so that when that big annual payment is due you know you’ve got it covered.
Do you need to save for Christmas? For the annual school-supplies-new-clothes-and-a-haircut? For travel? How can escrow accounts help you?