Wednesday, November 05, 2008

3 Freedom Fund Categories

A Freedom Fund is a great supplement to the Emergency Fund. It stands to reason that there are categories of upcoming expenses that are likely to come up within a year or two and you can easily save for these expenses, a little each month, above and beyond your normal savings.

This past weekend, the cat got sick and required an ER visit which totalled over 300 dollars. This was an unexpected expense -- the reality is that most people can't easily absorb it. My budget is certainly tighter now this month, but it is not undoable in any way. Fortunately, the experience has showed me it is a good idea to review the expenses to see what, if any need to be revised.

The first that you might be overlooking (if you're like me) is pet expenses. These can run into thousands of dollars, so it is important to budget for this so that a pet-emergency doesn't totally ruin your finances.

The second is an inflation buffer. This seems a little strange, but the reality is that our normal adjustments don't work and are not always sufficient. Normally, I try to adjust my budget once or twice yearly at the end of the year and/or during raises. But sometimes, there is no additional money and prices continue to climb. Simply save some money that you can use in the event that inflation spikes unexpectedly on daily items like heat/food/transportation etc. This is not emergency money since rising prices is not an emergency.

The third is a car-replacement fund. Obviously, the goal is always to pay off debts, including car loans. Once the car is paid off, you'll want to save money in a fund to handle maintenance. Unfortunately, the car will not last forever and while it is tempting to simply spend the 'car payment' money, but this should be (at least in part) set aside to help defray the cost of replacing the car in years to come.

These are three somewhat strange, non-emergency categories that I have in my freedom fund now. What categories are there? What has been your experience with your own freedom fund?

No comments: