Why Your Budget Needs Repayment Funds
In my post yesterday, “ How to Budget Contingencies,” I described paying off funds as “one of the best ways to budget,” which means it’s time for me to tell you how they work.
Basically, a payoff fund allows you to put money in a specific budget category so that it is there when you need it. Many people automatically create repayment funds for large expenses like vacations, weddings, and down payments. We don’t always create repayment funds for expenses like car repairs, new laptops, or holiday gifts.
When you realize that the holidays come every year (whether you like it or not) and you might as well start saving for them in January … well, that’s a drastic budget change.
There are several different ways to create a payoff fund. If your bank allows you to create multiple checking or savings accounts, it is relatively easy to create individual accounts marked “holidays” or “car repairs” and transfer some cash to those accounts each month. (Bonus points if you make these transfers automatic.)
Budgeting apps also let you set redemption funds and savings goals – YNAB , for example, is designed to practically force you to create redemption funds for everything from birthday gifts to tech upgrades, not to mention your annual YNAB subscription fee.
If you’re tracking payments through a budget app rather than transferring money to a unique bank account, be sure to use the app as a guide to how much you can spend each month, not the amount of money in your checking and savings accounts. After all, you’ve already told the app that some of your money is set aside for a smartphone that you will need to buy next year.
When you create redemption funds, you can make them targeted or monthly. In other words, you can say to yourself, “I need to set aside $ 1200 for a new laptop,” and stop investing in the fund once you reach your goal, or you can say to yourself, “I want to save $ 20 every month for future tech upgrades. … “And then … well, you just have to save $ 20 every month forever, because there will always be new tech updates.
But this is the meaning of repayment of funds. There will always be new technologies, there will always be gifts for the holidays, there will always be car repairs, weddings of friends, and annual gatherings. In some cases, these costs are rare but predictable; in other cases, they are unpredictable, but easy to foresee.
So start saving some cash while waiting.