.svg){kind=icon}
What is a special purpose fund?
Until now, the home budget allowed you to cover the current costs of living, but after all, that is not its purpose. You can do it without him. It's time to jump into gear and start planning your needs and wants in the long term.
We will start with whims, because it is much more pleasant.
The purpose fund is to help you achieve something you want, although you don't have to have it at all. Or you have to — only you decide it, no one else. In any case, you are not able to cover such a cost from a single withdrawal. A special-purpose fund is a clever solution that will definitely make it easier for you to save.
Suppose one day in July you came across a video on the Internet with tricks on snowboarding. You were reminded that as a teenager you dreamed of riding a board, but the peak of opportunities was a borrowed apple. Today, you are an adult and you are supporting yourself. It's time to fulfill your desire. White madness awaits you this year!
After searching through dozens of articles, tutorials and specialized forums, you have already collected a list of the necessary equipment. Board, fasteners, shoes, grease and all the rest. You know exactly how much it will cost. A few thousand? Quite a lot, but you can handle it, after all, dreams are worth any price. So every month you put aside as much as you can, thanks to this you managed to collect the necessary amount already in March. Exactly after the end of the season.
What went wrong? You've run out of a little help!
How to build a special purpose fund?
You create a special purpose fund to finance specific expenses that are greater than your monthly capacity. That is, you need to spread this expense in installments. But not in a bank or loan company, but alone with yourself.
An effective special purpose fund is based on several foundations:
- specific purpose;
- specific amount;
- specific date;
- separate place to store money.
Let's go back to the mentioned snowboard. If we have July, the equipment costs a total of 2.000 zł, and you currently have 200 zł in savings, then how much do you have to save per month to drive already in this season and not next season?
It's simple. Divide the necessary amount, for the remaining time. For example, it will be:
(2,000 PLN - 200 PLN) /6 months = 1,800 PLN/6 = 300 PLN
This means that you need to save at least $300 per month. You can, of course, more as long as you are able, so you will reach your goal faster. However, if you do not have the opportunity to deposit such an amount every month, then you will buy a board only at the sale after the season. It's like saving money, but a year in the back.
Why did I mention the separate storage of funds? When you have only one account and all the money in it, then the savings are mixed with the funds to cover your daily expenses. It is easy to violate in this way what was supposed not to be touched.
Open a dedicated sub-account in your bank. Give it a suitable name (for example, a snowboard), set a specific date and amount. In some banks, you can set a matching icon or even upload a photo. All this will remind you of what you are striving for. You will also see the progress of deposits and how much you still lack.
I recommend setting the date a little in advance. Not only will this improve your discipline, but it will also allow you to make satisfying purchases without haste.
Irregular Expenditure Fund
A very similar construct is the irregular expenditure fund, but it does not serve to satisfy our whims, but to hedge against expenses expected but incurred occasionally. After all, you are aware of their occurrence and know perfectly well that they are inevitable during the year.
Unfortunately, most often you remember them just before the due date, and figuring out an extra few hundred zlotys can turn out to be a big problem.
Car accident and AC insurance, annual service, property tax, a semester in college or the settlement of central heating fees and many other costs that you do not remember on a daily basis - as long as all these expenses are evenly distributed throughout the year, they are not much of a problem. The matter is complicated when such charges accumulate over a short period of time.
If, after covering daily living expenses, your household income allows you to save, for example, 850 PLN per month, then there is no chance that you will pay all the bills at once. And if you specifically do not put aside for them in advance, then there is a high probability that this money will go away under “unexplained circumstances”. However, the 850 PLN per month is more than 10,000 PLN per year! It will be enough for all the fees, as long as you take care of it.
How to Build an Irregular Spending Fund?
The size of the fund of irregular expenses for each person will be different. Mine could be $5,000, yours $10,000. It all depends on how much you have such expenses.
Make a list of everything that comes to mind and for each item enter the appropriate amount. If you don't know how much you're going to pay next year, don't worry. Use those from the previous one. The change probably won't be big. If you already know how much money you need to cover all expenses, divide the total by 12 months. You will receive the amount that you should deposit per month.
If you feel that this may be too small and you need a greater margin of safety, divide everything by 10, but still postpone for the whole year.
For example: after adding up all the costs, 6,000 PLN came out, when dividing into 12 equal parts every month you have to put aside 500 PLN to collect the whole. However, if you divide the whole by 10, then every month you should set aside $600. Thanks to this, you will either collect the entire amount in 10 months, or you will have 7,200 PLN at your disposal.
Remember that these funds are not mixed with the daily budget in the main account. They can't go back to the spending pot. Use a sub-account or a separate account — as you see fit — but don't make it particularly difficult for you to access them. Just eliminate the risk of unplanned violation of this money.
