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monthly budget

Have a Budget Account – To Keep You From Raiding Your Emergency Fund

By //  by Kevin M

Most of us are familiar with the concept of an emergency fund and why you need one. It is the most fundamental type of savings that you can have, because it is there to provide a cushion against sudden and unexpected financial issues.

Some people are never able to get an emergency fund going. As a result, they often don’t move on to achieve any level of financial independence because they are constantly faced with emergency situations and no funds to deal with them. Others establish emergency funds, but end up draining them for non-emergency purposes.

Emergency Money Box

The best way to avoid that fate is to set up dual savings accounts – an emergency fund, and a budget account that will prevent you from raiding your emergency fund when it is not absolutely necessary.

Set Clear Definitions For An Emergency

The only way to have a successfully functioning emergency fund is if you set very specific definitions as to what constitutes an emergency, and you never dip into the account unless the crisis fits neatly within the definition.

Everyone’s concept of an emergency fund tends to be a little bit different, but I think that the key definitions are sudden and unexpected. Sudden, as in an event that seems to come out of nowhere. If it is something that you knew was coming, it does not fit within the definition of sudden, and is not a legitimate emergency.

“Unexpected” is another critical definition. If a financial event is truly unexpected, it means that you had no reason to prepare for it in advance. Anything that you do know beforehand should hardly constitute an emergency.

A job loss, for example, can qualify as an emergency because it is sudden and unexpected. Replacing all four tires on your car doesn’t fit either definition, because it is a maintenance item that you knew about long in advance.

An Emergency Fund Should Never Be A General Use Bank Account

An emergency fund should be an account that is special and set apart from the rest of your finances. If you are using your emergency fund simply to cover monthly budget shortfalls, that is not a true emergency fund. It is important to maintain that distinction, otherwise an emergency fund is simply not an emergency fund.

Your checking and savings accounts should represent your general use bank accounts. That means they are available to cover your normal budget, as well as any expected expenses. If there is an imbalance here – that is, an insufficient amount of money in these accounts to cover your expenses – then you have a structural financial problem. The problem could either be insufficient income, or excessive spending. An emergency fund will not fix either of those problems, nor should it be expected to.

Set Up A Budget Account To Handle Expected Expenses

One of the ways to avoid imbalances in your budget, is set up some sort of budget account. This should be an intermediate level account. It should be more accessible than your emergency fund, but less so than your checking and savings.

While your checking and savings should be available to meet your normal spending budget, and your emergency fund is held for true emergencies, a budget account can function as a halfway type of account.

You won’t use this to pay regular bills, but rather you’ll use it as a an account to pay for anticipated expenses. This will largely include maintenance costs and near-term spending priorities. Knowing these expenses are coming up, a budget account will enable you to put money aside in anticipation of meeting them.

Maintenance costs that you should be funding through your budget account can include:

  • Expected car repair expenses. If for example you expect to average $1,000 per year for car repairs bills, you should be putting away about $80-$90 per month to budget for this.
  • A roof replacement that’s expected in five years – if the cost will be $6,000, you might want to begin saving about $100 per month in anticipation. The 60 months between now and then will allow you to save the money you need.
  • Your refrigerator is ten years old, and it will cost $1,000 to replace; figuring it will last another two years, you may want to begin saving at least $40 per month ($1,000 divided by 24 months).

Near term spending priorities might include some of the following:

  • Saving up money for a family vacation. If you know that you’ll be spending around $3,000 for your vacation, you should be putting $250 into the account each month ($250 X 12 months = $3,000).
  • Holiday expenses. You can think of your budget account as being something like a Christmas club account – putting away a certain amount of money in anticipation of heavier expenses at the holidays.
  • Your eight year old looks like she may need braces in a few years – you can begin saving for this in your budget account.

Each of these expense types are fully expected, and therefore they are hardly emergencies. You can and should budget for them, and by having a budget account set up you can do just that. If you do it faithfully, you will not need to raid your emergency fund, nor drain your regular checking and savings accounts.

It seems a bit complicated, but can you see the merit of having dedicated accounts to cover different levels of expenses?

Filed Under: Budgeting Tagged With: Bank Account, budget, Budget Account, Budget Shortfall, Budgeting, Checking And Savings Account, Emergency Fund, emergency funds, expenses, finance, monthly budget, personal budget, Savings, Savings Account, Secured Financial, Your Emergency Fund

Be Sure To Budget Fun Into Your Family Finances

By //  by guest

[The following is a guest post by Miranda Marquit, about the need to budget fun into our finances]

Budget Fun Into Your Family Finances

When many of us think of budgets, we immediately groan – and think of restrictions. While it is important to make sure that you save money, get good deals and avoid debt, you also need to think of your budget as a way to enable you to have fun. While you’re going through your monthly budget, make sure that you include a little enjoyment.

Prioritizing

Part of effective budgeting is prioritizing your spending. Think about what is important to you, and what you really like to do. If you enjoy playing video games, don’t impulsively spend money on a new DVD. Budget your discretionary income so that you can be the things that are most important to you.

This can also include saving up for a vacation or a major purchase. Remind yourself that your priority is to enjoy that family trip. Budget your money so that you can set some aside in savings so that you can go on your trip in four months instead of seven. When you are budgeting in the fun stuff, you need to make sure that your spending reflects your values – and you need to make sure your needs (food, shelter, transportation, etc.) are covered first.

Inexpensive Fun

The fun category in your simple budget doesn’t need to be huge in order for you to enjoy yourself. There are plenty of entertaining things you can do for less. Sign up for daily deals and discounts to see if you can score a promo price on some of your entertainment and recreation costs.

Also, consider low-cost activities. A picnic in the park is a great activity – and it doesn’t require a large expenditure. Bike riding, family game night, a Red Box movie with homemade popcorn, and a neighborhood scavenger hunt are all low-cost activities that everyone can enjoy.

You can even save money on family outings. Go to a matinee, or go to the $2 movie, instead of visiting an expensive theater during the evening. Instead of getting goodies at the show, go out for ice cream afterward. Look for discount passes, free admission days and local specials at museums, amusement parks and zoos. During the summer, many city parks feature free concerts.

When you make your fun budget, make sure you consider the ways you can save money and have a little inexpensive fun. You might find that the “fun” portion of your budget doesn’t need to be as big as you thought.

Bottom Line

Leaving fun out of your budget can leave you feeling deprived. However, it doesn’t have to break the budget. Carefully consider how much you can spend on enjoyment each month, and then look for activities that fit into that budget. With some creativity, and a focus on activities that provide you the opportunity for some family fun, you might be surprised at how much fun you can have, no matter your budget.

Miranda writes for a variety of personal finance web sites, including the AllBusiness Personal Finance Corner and InsuranceQuotes.org, a site specializing in online insurance quotes.

photo by photostock

Filed Under: Budgeting Tagged With: budget, budget your money, debt, enjoy, enjoy life, family finances, finances, fun, fun stuff, inexpensive, monthly budget, your family

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