So Faith did a great job last week of discussing what an Emergency Fund is and why you need it (https://chieffinancialmom.com/blog/cfm-emergency-fund-challenge/). But there are so many other things that aren’t necessarily monthly that would normally go in your spending plan or budget, but neither are they a catastrophic emergency. For example, expenses like your quarterly water bill, the occasional car or house repair and maintenance, holiday and birthday gifts, vacations, annual insurance payments, pet and vet bills, etc., can quickly add up and wreak havoc to the best-made budgeting plans.
Take holiday gifts for example. Holidays and birthdays occur at the same time every year, but how many of us totally freak out when they arrive and we end up running up the credit card bill and later have to figure out a way to pay for it.
Instead of this chaotic approach, let me introduce what I call a “life fund”.
Unlike an emergency fund that you want to build over time, this money is saved separately from your regular bill-paying accounts in order to save up for expected expenses that you know are coming up and yet seem to surprise you every time. Let me share some tips on how to save for this regular but irregular expenses:
1. Project needed expenses that are not included in your monthly budget
It can seem overwhelming, but the best place to start is to write down what you anticipate you will spend in the upcoming year (use our life fund sheet here to make it simple: https://chieffinancialmom.com/wp-content/uploads/CFM-Life-Fund-Guide_v2.pdf). Include any expense that you pay bi-monthly, semi-annually, annually, or anything other than a monthly expense that you’ve already captured in your monthly spending plan. Examples can include things such as quarterly water bill, car or house repair and maintenance, holiday and birthday gifts, vacations, annual insurance payments, pet and vet bills. Make this fit whatever your lifestyle and financial situation. Put the expenses in the month you anticipate you will pay for them. For example, if your personal property tax is due every September put the entire amount in that column.
2. Figure out the needed monthly savings amount
Once you’ve input each category, add each one up to find a yearly total. Then go back and add up the cost by month. Finally, add up each category for a yearly total sum and then divide by 12. This is the amount that needs to be saved monthly to meet your life expenses (outside of your monthly budget expenses and in addition to your emergency savings account).
3. Make it automatic & keep it separate
As we talked about last week (see post here), this is probably the most important part. In order for this savings bucket to be successful, you will need to set up an automatic transfer into the account that you are using to hold this money until it is needed so that you can set it and forget about it. It’s also vital that you keep it separate from your regular bill pay account or other checking accounts so the money is not spent on something else. Essentially, this is a holding place for the money until the anticipated expense arrives and the amount is due. Once the bill comes due or the event happens, you can then transfer the money out and use it on the item you need to pay for without wreaking havoc to your spending plan.
This is a simple solution to keep things as stable as possible in your monthly expenses while also not dipping in or pillaging your emergency savings fund. I hope this new technique helps you to stash some cash away for upcoming anticipated expenses.