Introduction To Creative Thinking

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Savings Funds as Tool for Effective Budgeting

Once a personal or family budget has been setup and running, with basic elements of income and expenses understood along with financial goals identified, other factors that can support maintain an effective budget should also be considered. One of these factors is to setup saving plans.

Get Savings and Spending under Control

Get Savings and Spending under Control

A wise budgeter uses savings for a lot more than just a retirement nest egg. Proper savings are setup, including a free checking account, supporting the budget to be on track. It’s all about saving and spending the proper way. Four types of savings or personal funds are identified:

Contingency or “Rainy Day” Fund

These are unexpected expenses that can happen when least expected. Some examples are medical expenses, water pipes or leaky roofs, car repairs, and few other contingencies around the home. It may also be emergency expenses from friends and relatives like loss of a loved one. What can be done is to set aside part of income in a special contingency fund to handle these urgent needs, discover more here.

Income Reserve Fund

For those whose income is irregular like writers and artists, this is recommended to carefully manage a visible savings (or investment) account to park funds during the high times of an income cycle. “Park” means to have funds that come in handy during financially dry times. These funds are managed and planned for the future. If possible, temptation should be avoided for unnecessary spending during the same week or month that the income is received.

For those who own small businesses, a practical way to save income is to keep it in the business. Money is drawn only when necessary.

Leisure or “Want” Fund

Everyone needs to unwind, to relax and to re-energize. It may be a holiday or vacation. The right way to buffer this need is to set up another account that is paid into each month. When the time comes for leisure, money is available. Otherwise, the usual recourse is to pull out the credit card, which inevitably incurs more future expenses and interest payments.

Obligation or “Must” Fund

These are savings designed to meet expenses that occur during the year, a one off payment such as property taxes and most types of insurance payments due once or twice a year, for example.

Savvy budgeters or savers try to plan ahead by setting aside an amount per month in their “must” fund. For the homeowner, this is a sort of like an impound account used by mortgagers to ensure property tax and homeowner’s insurance payments.

All these kinds of savings can be grouped or combined with the other accounts. They don’t necessarily have to be separated. What is important is to track and record what in the savings account is for a particular savings fund.

Savings as a financial tool is used to sustain a smooth annual budgeting cycle.