Most people don’t consider the fact that they need to budget their savings account. If it’s there, it’s there, right? Maybe, but maybe not. Imagine this: You use part of your savings to go on vacation. While you are gone, the air conditioning in the car goes out and you have to replace it because who wants to listen to that whining on vacation? Then you take the kids to the zoo because that’s a fun, family-friendly activity, but your child falls off the jungle gym and has to go to the Emergency Department and get his broken arm casted. Suddenly, not only is your fun, hard-earned vacation ruined, but your savings is drained by these unexpected expenses. You are really regretting this trip that you thought you could afford. What on earth happened? Let’s talk about how to budget your savings to ensure that you have enough to cover everything you need, including the unexpected. I’ve designed a beautiful PDF savings budget form to help you get started. You can sign up to get that here, my friend.
How to Strategically use your Savings
Your savings account has a very low interest rate so this is not the location for long-term investments. This is the place to store money for fast access in case of emergencies or for items that you are saving to purchase in the next several months to a year or so. We allocate a certain amount of each paycheck to go to savings and then directly deposit other income into this account, including bonuses, gifts, tax returns, and that glorious extra paycheck that comes around two times a year for those on the biweekly schedule.
We categorize our savings account into a “budget” much like our monthly spending budget. The emergency fund is non-negotiable, but the categories can otherwise be created to suit your family’s needs.
- Emergency fund: This is VITAL! Start now and work to get at least $1,000 saved as quickly as you are able. This is the fund you would use to cover an unexpected health insurance deductible if your child breaks his arm. This is also the fund you would dip into if you are unable to work for a short period of time for whatever reason. Essentially, this is your little self-insurance policy. Obviously, we never plan to have emergencies, but they happen and that is why we need insurance. Make it your goal to ultimately save six months of living expenses in this category. That should cover you in case of temporary job loss, high insurance deductibles, or other totally unexpected costs that could be devastating. This sum of money will help you lay your head down and rest at night because you know that if all else fails, you will be able to get by for a few months until you can figure something out.
- Medical/dental expenses: Most people go to the dentist every six months and many go to the doctor every few months. While co-pays are not usually a debilitating expense, when you multiply them by the number of people in your family, it is a significant expense. These may be predictable, but they are still expenses that require planning. Add up those co-pays and divide the annual total into monthly increments. Deposit that amount into this category each month so that you will have the money when you need it.
- Car expenses: It’s a sad fact of life that cars require maintenance. Oil changes, brake pads, tire repairs, and other car-related expenses really add up quickly. You may have your monthly spending budget down to a tee and then blow it out of the water with an unexpected car repair like the air conditioning example above. Add up how much you spend annually on oil changes, new tires, license and registration, and then figure about $400 extra for miscellaneous expenses. Again, divide into monthly installments and deposit into this category to have on hand. Chris and I add car insurance into this monthly allotment because we prefer to pay it annually to save money.
- New(ish) car: After you work your tail off to pay your debts, you don’t want to be forced back into it when you need to replace a vehicle. We know that our ten year old sedan with 130,000 miles probably isn’t going to last forever so we’ve been working on this category. Decide when you want to purchase the vehicle (delay this as much as reasonably possible), what kind of vehicle you want to buy, and how much you would like to spend. Figure out your monthly installments and deposit. Wave goodbye to your car payment forevermore.
- Adoption: This is another one we’re working on right now.
- House down-payment: Our goal is to have at least a 20% down payment when we are ready to buy a house. This one is a slow and steady goal.
- Vacation: This one wasn’t always included because we did not have the extra money to take vacations. After we paid off our debt and I finished graduate school, we were able to add it. Decide how much you want to put towards vacations each month. Even if it’s just enough to have a long weekend away, you will be able to go without guilt if you have budgeted for it.
- Christmas: Please budget for Christmas and make sure to keep it within your means. This is meant to be a celebratory time of year with loved ones and instead it is a HUGE source of financial stress for so many people. Plan ahead and you can sing joyously with the Whos down in Whoville throughout the Christmas season. Stay tuned for some suggestions for how to save on Christmas. And for Heaven’s sake, use Ebates if you’re shopping online!
- School tuition: This is no longer a relevant issue for us, but it was a real whopper for a few years. Educational debt is not unreasonable, but try to pay for as much of the tuition as you can to keep the loan to a minimum.
Aside from the emergency fund, you can budget your savings to include categories for whatever your needs are in that season. As always, the goal is to control your money and have the funds you require when you need them. It really is exciting to see these categories grow. Each month, we are closer to buying that spaceship minivan I mentioned in another post and I am pumped about that baby! Our house fund is growing painfully slowly, but it’s progress nonetheless and we just keep chugging. Patience and persistence always pay off so hang in there. We can encourage each other while we drive our beaters! Don’t forget to click this link to get your free Savings Budget printable and tips to help you get started. What other fun savings categories are you adding?