What is an earmarked fund?
Up until now, a household budget has allowed you to cover the day-to-day costs of living, but after all, that’s not its purpose. You can do it without it too. It’s time to kick into high gear and start planning your needs and whims for the long term.
We’ll start with whims because they are much more fun.
An earmarked fund is designed to help you achieve something you want, even though you don’t need to have it at all. Or you do – but only you decide about that, no one else. In any case, you are not able to cover such a cost from a single paycheck. An earmarked fund is a smart solution that will definitely make it easier for you to save.
Suppose you came across a video of snowboarding tricks on the Internet one day in July. You’re reminded that as a teenager you dreamed of riding a board, but all you could get was a borrowed bum slider. Today, however, you are already an adult and you earn a living yourself. It’s time to fulfill your desire. This year you’re in for some white craze!
After sifting through dozens of articles, tutorials and specialist forums, you’ve already compiled a list of essential equipment. Board, fasteners, boots, grease and all the rest. You know exactly how much it will cost. A few thousand? A lot, but you can do it. After all, dreams are worth any price. So you put away as much as you can each month, so you were able to raise the necessary amount in March. Exactly after the end of the season.
What went wrong? You lacked a little help!
How do you build an earmarked fund?
You create an earmarked fund to finance specific expenses that are greater than your monthly means. This means that you have to spread this expense in installments. But not with a bank or loan company, but with yourself.
An effective earmarked fund rests on several foundations:
- specific purpose;
- specific amount;
- specific date;
- a separate place to store money.
Let’s go back to the snowboard. If it’s July, the equipment costs a total of 2,000 zlotys and you currently have 200 in savings, how much do you need to put aside each month to go riding this season and not the next?
It’s simple. Divide the amount needed by the time remaining. As an example, it will be:
(2,000 zlotys - 200 zlotys) / 6 months = 1,800 zlotys / 6 = 300 zlotys
This means that you need to save a minimum of 300 zlotys per month. You can, of course, save more as long as you are able to, so you can reach your goal faster. However, if you can’t put aside that amount of money every month, you will only buy the board at a post-season sale. Seemingly a savings, but a year down the drain.
Why did I mention separate storage of funds?
When you only have one account with all of your money in it, savings get mixed in with the funds to cover everyday expenses. This way it is easy to grab what you were not supposed to touch.
Open an earmarked sub-account with your bank. Give it an appropriate name (e.g. snowboard), set a specific date and amount. With some banks, you can set a matching icon or even upload a photo. All of these things will remind you of what you are striving for. You will also see the progress of your contributions and how much you are still missing.
I recommend setting the date slightly in advance. Not only will it improve your discipline, but it will allow you to make satisfying purchases without rushing.
Non-recurring expense fund
A very similar construct is a non-recurring expense fund, but it is not used to fulfill our whims, but to hedge against expenses that are expected but incurred occasionally. After all, you are aware of their occurrence and know well that they are unavoidable throughout the year.
Unfortunately, you usually remember about them just before the due date, and coming up with an extra few hundred zlotys can be quite a problem.
Car third party insurance and comprehensive cover, annual maintenance, property tax, college tuition, underpayment for central heating and many other costs that you don’t remember about on a daily basis – as long as all these expenses are evenly distributed throughout the year – they are not a big problem. The matter gets complicated when such charges accumulate over a short period of time.
If after covering your daily living expenses, your household income allows you to save e.g. 850 zlotys per month, there is no chance that you will cover all the payments at once. And if you don’t specifically set aside money for them beforehand, there’s a good chance that this money will be gone in “unexplained circumstances”. However, 850 zlotys per month is more than 10,000 zlotys per year! There will be enough for all the charges, as long as you take care of it.
How do you build a non-recurring expense fund?
The size of a non-recurring expense fund for each person will be different. Mine can be 5,000 zlotys, yours 10,000. It all depends on how many such expenses you have.
Make a list of everything that comes to mind and write the appropriate amount next to each item. If you don’t know how much the charges are going to be the following year, don’t worry. Use those from the previous one. The change probably won’t be much. If you already know how much money you need to cover all your expenses, divide the total by 12 months. You will get the amount you should be putting away each month.
If you feel it may not be enough and you need a larger margin of safety, then divide everything by 10, but still put away throughout the year.
For example: after adding up all the costs it comes out to 6,000 zlotys. If you divide it into 12 equal parts every month, you have to put aside 500 zlotys to gather the whole amount. However, if you divide the total by 10, you should be putting away 600 zlotys every month. This way, you’ll either collect the entire amount in 10 months or have 7,200 zlotys available.
Be sure these funds are not mixed in with the daily budget in your main account. They can’t go back into the spending pool. Use a sub-account or a separate account – whatever you’re comfortable with – but don’t make it especially difficult to access. Simply eliminate the risk of an unplanned grab of that money.
