This post is part of the series Budget Guide
Other posts in this series:
- Budget Guide: Monthly Income and Bill Schedule
- Budget Guide: Evaluating Housing, Bills and Expenses
- Budget Guide: Organize Your Savings! (Current)
We are going to be looking at a few methods that will help you keep a buffer in your checking account and divide your savings account into “funds”. When your savings is organized, it is much easier to know how much you have saved, what the savings are earmarked for, and how much you still need to reach any saving goals you may have.
Choose a fake zero
Some of my favorite advice that my mom shared with me when I began working was to create a “fake zero balance” in my checking account. Basically, she said to pick a specific dollar amount that would act as my zero. Depending on your income, it can be $250, $500, $750, or $1000. Even if your income is very tight, it is worth saving for a month or two to get a larger padding.
This money is not to be touched unless for emergencies! You need to re-train yourself so when you see your “fake zero”, even if it is $500, you do not “see” the $500 as available funds. It looks like a $0 to you. After a few months of reminding yourself, you will discover the temptation to dip into that money for non-emergencies lessens and eventually goes away.
Keeping a fake zero in your checking account means that you do not have to worry about bounced checks nor standing in a grocery line with a cart full of food and no money in your account to pay for it. It is a safety net and can give you piece of mind that, should an emergency happen, you will be fine.
Now for the savings! Many financial experts recommend saving 20-30% of your monthly income if possible. This may seem like a huge amount so begin with smaller steps and see how you can work it up. Based off your monthly income, determine the bare minimum you can transfer to a savings account each month. No matter what, every month you can either manually or automatically transfer that amount into your savings.
With the savings from the other areas, you may discover that you can save more than you expected. Each month is different as well. You may only be able to save your minimum one month and the next twice that much.
Divide Savings into Funds
Though your savings are all grouped together in your account, I highly recommend creating a simple spreadsheet in the program of your choice. You will want to track the money coming in and out of your account as well as divide the balance into “funds”.
In my spreadsheet, I have one section that tracks the basic deposits, dividends, and withdraws. Above that, I have a few lines in which I have created different “funds” that I separate the total savings into.
You need to decide what you are saving for and create funds that match your needs.
The first thing you should do is to create an Emergency Fund. Yes, you have some emergency padding in your checking if you use the “fake zero balance” advice above, but this is a much larger emergency fund. Many financial experts agree that you should work your Emergency Fund up to the equivalent of three months’ income. I know it can be difficult, especially with other expenses, but each month add a little into the Emergency Fund and force yourself to never move money from it unless it is truly an emergency.
This is another safety net! Should you lose your job, you will have three months income available while you apply for new jobs. If you have an unexpected emergency expense (car repairs, home repairs, speeding ticket, etc.), you have the ability to pay it without having to rely on credit cards or a loan.
Vehicle Maintenance Fund
Another fund that we use regularly is the Vehicle Maintenance Fund. My husband and I have two vehicles.
Mine is a Ford, completely paid off, and runs well for minimal in-town errands. It is in desperate need of a paint job, the air conditioning now works
does not work (which made driving around Phoenix in the summer a miserable experience), and it could use a few other repairs but overall it does not cost us much to maintain.
My husband’s vehicle is a Nisson, and he is still paying it off. It unfortunately just hit the ten-year-mark which means it has been requiring some expensive fixes. However, it is a great vehicle, my husband drives it daily, and we use it for all of our trips. So we decided the Nisson is our primary vehicle and worth keeping in tip-top-shape. The Ford is our extremely reliable backup.
We have decided not to use credit cards for vehicle maintenance. My husband did that with his previous car and long after he trade it in, he was still paying off the credit card. Not a fun experience seeing hard-earned money disappear for a car you no longer even have! So after we married we created a Vehicle Maintenance Fund in our savings. We had both vehicles evaluated by a mechanic so we have a general idea ahead of time what needs done, an estimate on the price, and the timeframe we have to save up for it. Every month, we add money to the Vehicle Maintenance Fund until we have enough to take one of the vehicles in.
The other funds you create will be specific to you and your family. Ours includes a down payment fund for a future home and a baby fund for expenses. (Our first little one will be born in September!) You might choose to create a Vacation Fund to save up for a dream vacation, a new vehicle fund to buy a new car, or whatever your goal(s) may be.
Tracking your monthly income and expenses, giving yourself a budget for expenses, and organizing your savings will greatly improve your financial situation. I highly recommend working towards a “fake zero” in your checking account and a three month Emergency Fund in your savings. These are safety nets that are important to have, especially during times of economic difficulty or uncertainty.
Our last post in this Budget Guide series will be about putting aside money for any children you may have.
Continue reading this series:
Budget Guide: Your Children’s Future