Sunday, May 17, 2015

Monday is for Money: Create Funds

In this "Monday is for Money" I want to talk about a side to your budget that you may not be considering.

Budgets should contain two main spending categories: Monthly spending and funds. Most of what I have written about deals with the monthly spending category. Your budget should be set up in a way where you can understand how your cash flow works month-to-month, making adjustments when you have your meeting of the minds, all with the goal of having a zero-based budget. For example, if you overspend on groceries, consider adjusting your budget for the next month by changing the budget from another category where you aren't spending as much. It is good to remember that the budget you set only needs to be set for that month.

Your monthly spending will be most of your categories, but you should also consider having some items in your budget set up as funds. Funds are established when you know you will be spending on that item periodically throughout the year or in a few years. The major benefit of funds comes out of the same philosophy as budgeting in general: You get to plan financially for your future, both expected and unexpected events, with a level of control you haven't had before. Here are some categories I recommend for funds:

  • Emergency Fund: This is the primary fund you should establish right away with your budget. I have covered this in other posts, but it can be in a high-yield savings account. Get it to at least $1,000 and don't let it drop below that, unless, of course, you have an emergency.
  • Christmas Gifts: Most of us love to give around the holiday season. I'm not by any means a gift giver, but I still love getting presents for people around that that time of year. But don't you hate looking at your credit card bill in January? Knowing that, what about setting up a fund that you put some money toward every week or month until November. 
  • Car Maintenance & Replacement: Basic maintenance on a car requires an oil change and tire rotations roughly 3-4 times a year. You also know that your car isn't going to last forever, whether because you have a two-door that can't fit more kids or just for the fact that cars don't last. So why not set up some funds for both so that your covered for your maintenance and, when the time comes for a new car, you can either buy the car outright (like we just did with our most recent purchase) or put a massive down payment on something else. You might say, "what about bigger, unexpected repair expenses?" Boom! - Emergency Fund is there!
  • Vacation: This might seem like common sense; all of these might to you, but most people don't live this way. Instead of planning toward something we "live in the moment" and assume we'll just be able to pay for it later. This happens with vacations. Many plan vacations, the details of them, but with the mindset that they can pay them off later. Why not plan with your finances as well? Set aside money every month for the generic vacation and, when the time comes, you can apply it toward that trip to the islands or to New York, like we did!
Have you started any funds yet? Any from these items? Which would you add?

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