How many times have you been busy with life and suddenly remembered “Shit! My car insurance expires this month. How could I forget ?!” or “Damn it! I completely forgot that my cat needs an annual vet this month … It is not known how much it will cost. “
These costs are routine and predictable. But since they don’t happen every month like clockwork, they take you by surprise and rob you of your budget.
This is where redemption funds come in handy! They help you prepare ahead of time for these occasional purchases, so they don’t drain your budget when they appear.
What are redemption funds?
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A repayment fund is where you strategically set aside chunks of money each month to pay for any planned non-monthly expenses that you may have in the future.…
Instead of feeling stressed and anxious about how you will pay for them, you save small amounts of money now so you can pay in full later. This is especially useful if you are planning to make a large purchase and do not want your monthly budget to slow down a lot.
What are some examples of redemption funds?
You can create redemption funds for literally any one-time purchases you need (or want) to make during the year. Here are 15 examples to get you thinking:
- Car repair.
- Car insurance.
- Life insurance.
- Home or renter insurance.
- Home service.
- New furniture.
- School supplies for your kids.
- Annual subscriptions (Amazon Prime, Gym, Squarespace, etc.).
- Regular doctor visits.
- Veterinarian visits.
- Birthday and Christmas gifts.
- New laptop or mobile phone.
- New glasses or contact lenses.
- Wedding expenses.
- Holidays.
Do you really need a maturity fund?
Imagine for a moment waking up to an email from Geico that says your $ 650 two-year premium is due in a few weeks. Could you…
- Panic, grab onto your credit card and worry about paying interest later? Or…
- Say, “It’s okay … I have enough money in my budget to cover this.”
If you are like most people, the answer is A. You would shout “Holy crap!” (or other swear words) and then try to figure out how to pay for it. You will undoubtedly experience stress for MAX.
This is why the maturity fund is so important. By saving a little at this, you won’t be caught off guard when the bill rolls out. You don’t have to worry about it and go back to your life.
How sinking funds can be used as a budgeting tool
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In truth, life happens and accidental expenses inevitably exceed your usual budget. Your best friend might invite you to the beach. You may need the latest iPhone. You may be having a tough week at work and you say: “To hell! I’m going to spend the day at the spa. “
When these events happen, it is better to have money in your bank account than to accumulate credit card debt or invest in your emergency fund to cover it. (Because let’s face it … these are not real “emergencies”).
When deciding which repayment funds you want to add to your budget, consider setting a savings goal that will help you pay those contingencies.
How to create redemption funds
Ready to create your own maturity fund? Here’s how to do it:
- List all the categories of depreciation funds you need.
- Guess how much you will spend in each category annually (this is fine if you don’t know the exact amount).
- Divide that amount by 12 months to figure out how much you need to save each month.
- Move this money into the indicated categories every time you get paid.
For example, if you know your renter’s insurance costs $ 244 every January, invest $ 12 a month into it. If you know it costs $ 100 to register your vehicle, set aside $ 8.33.
Even if you don’t know how much something will cost – like the vacation you’re going to take later this year – you can still make an educated guess based on how much you’ve spent on vacation in the past.
When you’re ready for your next vacation, you can directly invest in your vacation fund without hitting your budget too much.
Relief Funds vs. Emergency Funds: What’s the Difference?
The emergency fund is for real emergencies – you lose your job, you get hurt in an accident, your car is broken, your roof is damaged in a hurricane, and the like. Think of it as a fund to cover unexpected expenses and unpleasant incidents that you did not even know about. You know, the ones that cannot be planned in the monthly budget.
On the other hand, redemption funds are for irregular expenses. you know will happen at some point in the near future.
- You know that the oil needs to be changed every six months.
- You know that Amazon Prime membership is required once a year.
- You are a freelancer who needs to pay taxes on a quarterly basis.
- You know your sister is getting married in Hawaii next year.
These costs are predictable and you can quickly save on them by using redemption funds.
Read more: Emergency funds: everything you need to know
Where to store redemption funds
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Ideally, you want to keep your redemption fund in a free checking account or a high yield savings account where you can access it anytime – whenever non-monthly spending comes up.
Read more: Best High Yield Savings Accounts Comparison
Some people like to open separate checking or savings accounts for each category of redemption fund. If this works for you, then by all means open these accounts! But if you are like me and the mere thought of having 10+ bank accounts tires you, then let me tell you what I do.
I personally keep all of my redemption funds in an online savings account and then use YNAB (my all-time favorite budgeting app) to split it all up. I have repayment fund categories at YNAB for all the non-monthly expenses I need to save for – renter insurance, car insurance, vet visits, medical expenses, vacations, and even camping / camping equipment (because I really love nature).
But there are many budgeting apps that can keep track of all of your payoff accounts. We offer some tips in our article: The best budgeting apps to get control of your finances
Summary
Absorption keeps you from sinking further into debt when non-monthly expenses stand in your way.
Instead of being surprised when expenses come up, you have the money you need to cover them right in your bank account. No stress, no drama. Just sweet dollar bills that will keep you on your toes along with your personal financial goals.