I reckon it’s happened to all of us (millionaires excluded, obviously).
Your car splutters to a halt, the fridge breaks and your cat/dog/fish needs emergency surgery. And all in the same month as your best friend’s wedding in Bali. And you need buy a present. Your monthly salary just isn’t going to cover it — something’s gotta give.
This is where these funds come in — i.e. different pots of money, separated from your main account, which can be used to pay for both unexpected and expected expenses.
This is a “does what it says on the tin” fund. A fund for those emergencies which crop up unexpectedly throughout the year; if your car breaks down or your boiler stops working. Due to our landlord covering any house expenditure, our emergency fund is quite low — and floats around the £500 mark. We pay in £50 a month into it to cover any withdrawals.
This fund is for those annual expenses which can creep up on you, such as house insurance or a car MOT. Paying monthly usually involves credit, and therefore a (sometimes hefty) APR. This fund is also an easy one to calculate; add up the expenses that you could/should pay for annually and divide by twelve. Simple.
This fund is for those expenses where it isn’t necessarily predictable when they’ll crop up; things such as new glasses, dentist bills or even a new sofa or TV. You could merge it with the emergency fund, and simply increase the amount saved — but I find it easier to keep the pots separate. How much you need depends on your health and goals, but £500 is a good starting point.
Again, another “does what it says on the tin” fund. This is for those everyday items which you need but don’t purchase every month — things like clothes and shoes. This fund is perfect if you do your main shopping in the sales, as it means your finances aren’t getting a biannual hit. We put aside £40 a month towards this, although birthday money often tops it up.
With two small kids, Christmas and birthdays are a big deal for me. I want Christmas to be magical, and birthdays to be super exciting. But because of this, it can be expensive. Again, it’s an easy one to calculate — assign a budget for each person and occasion, and then divide by twelve.
These are a no-brainer, although with so many households living paycheck-to-paycheck they’re not always easy to build — especially if you’ve prioritised paying off debt as well. Finance professionals suggest that your minimum savings should be six months’ worth of salary, should anything happen to your job. We don’t have this (yet), and I’ve compromised with having enough savings to allow us to move (rented) house should we need to, and income protection insurance.
Finally, a fun fund. If you like to get away, you’ll need a holiday fund. In order to calculate your monthly payments you need to be aspirational — think ahead to where you want to go, how much it’ll cost and whether you want more than one vacation (or if you can combine it with some cheaper staycations).
As with all savings, you need to assess how much you can reasonably afford. At the moment we don’t have a holiday fund (boo!), nor are we accruing money for irregular expenses (cheers, maternity leave). Once our income streams are in better shape, these funds will follow.