Well, you're not alone. I hadn't heard of one either until the other day. After a bit of poking around, I present a short article on what a Freedom Fund is and how you can use one.
Covering your Backside
Every month you get paid (maybe every two weeks, but just go with me for a while). Every month you have regular expenses. Your mortgage/rent, your electricity, your phone and maybe you pay your insurance and a few other things monthly too.
Then you have some of those irregular expenses. Maybe your car tax is a once or twice a year thing. How about other insurance which is once a year. What about a magazine subscription or even an on-line service you use which is due this month.
These irregular payments are a complete pain in the backside. I know this. You know this. Everybody knows this but not everybody knows how to deal with them.
This technique enables you to deal with these expenses effortlessly and hopefully in the future, you won't think twice about an extra large outlay in any particular month.
Fund your Freedom
What you need is a Freedom Fund and it's no more complicated than just another bank account. I used to have a bills account but in all honesty, I don't have a need for it now since I know (roughly) what goes out of my main account each month. It's those payments that are irregular which hurt me, usually more than I expect.
All you need to do is stash away a certain amount of money each month so that when those irregular payments come in, you already have the money to pay them. Immediate access to enough dosh to get them paid and not worry about it. No searching for extra money in any of your other accounts, no shifting money around to make it happen, just immediate knowledge that you're already covered.
Worrying stops. Mental freedom starts here.
How Much is Enough?
Only you can tell. You have a good idea of what comes in every so often so you need to decide how much to move aside. It's worth over-estimating so that if your car needs extra repairs this year, your Freedom Fund covers it. I suspect you should roughly tot up the totals you expect to come in over the whole year, divide by 12 months and maybe add 20-25%.
For example, and these are very rough figures (off the top of my head), I have:
- car registration - 1/yr @ ~$200
- car insurance - 1/yr @ ~$350
- car Warrant of Fitness - 2/yr @ ~$50 (not including repairs)
- council rates - 4/yr @ ~$350
- on-line subscription fees (Flickr etc) - 1/yr @ ~$40
- ... and others
So my initial stab at the cherry says I'll be taking out about $250 per month to cover all of these irregular items (I'm sure I've missed some off the list though) and give me a bit of leeway into the bargain. Of course, after a short while, you should review where you're at and see how much you are under or over the amount you expected.
Again, the best way to build this up is exactly the same as for your Emergency Fund and yank this money straight out of your account on the day you get paid.
What about my Emergency Fund, isn't that for stuff like this?
Yes and No.
Generally you don't want to touch your Emergency Fund but every now and again it makes sense. You noticed in my list above that I ignored the fact that I might have to make repairs to my car after it had been for inspection. In that case, it would be considered an expense that I wasn't expecting ... whereas all of the other things I've mentioned are expenses that are expected but just happen to be irregular.
In general then, leave your Emergency Fund alone and just plan that little bit ahead with your new and fresh Freedom Fund. Dip into it if you have to but at least think twice about doing it.
The Leftover Stash
Once you've been putting into your Freedom Fund for a while, you'll be able to determine if your original monthly amount was about right. If you're lucky that you have been doing double-entry accounting for years then you already have good figures to base this fund on. The rest of us however, will have to guestimate what we expect and re-adjust when necessary.
If you're really lucky, you overestimated and your Freedom Fund is now growing a surplus. If I were you, I wouldn't be too worried - just keep topping it up each month - after all, it's in a high interest savings account. Isn't it?
What are your thoughts on a Freedom Fund?
Posted: 09 October 2008