Thursday, August 23, 2007

Adjusting my Freedom Account goal

Look in the "Goals for 2007" section of the sidebar and you'll see that I'm shooting for a balance of $3,000 in my Freedom Account by December 31. In my earlier post, I explained the Freedom Account concept. Essentially, I tally up all my predictable periodic (i.e. less frequent than monthly) expenses, and determine how much I need to save per month in each category. For example:
  • $500 for vehicle service every 4 months = $125/month
  • $74 for vehicle registration every 12 months = $6.17/month
  • $75 for license renewal every 60 months = $1.25/month
  • $89 for passport renewal every 60 months = $1.48/month
  • ... etc.
I then divide each category's monthly amount by two, and deposit that amount every two weeks into an ING Direct account. Then, when the expense comes up, I've already saved the required amount, and I have the cash on hand.

The $3,000 goal is essentially just the sum of all the individual "fully funded" amounts. That is, $500 for service plus $74 for registration, and so on. However, since stating this goal, I've realised that the true purpose of this account is not to reach a certain balance, but rather to ensure that these expenses do not interrupt my cash flow when they occur. The balance in this account is actually meant to fluctuate widely, as I contribute to some categories while simultaneously withdrawing from others. Therefore, the true goal for this account is simply for me to use it for these expenses. It's unlikely that I will ever actually reach $3,000 in this account, but by keeping me "ahead of the curve", the account will be doing its job perfectly.

I'm going to keep the $3,000 goal in the sidebar, but don't expect it to hit 100%.


SavingDiva said...

I might need to set-up a Freedom account as well. Currently I just dip into my EF for things like that...I guess that's why it is at $3!

Loonies And Sense said...

I highly recommend doing this; it makes a huge difference. I now always have some cash saved up for vehicle service and Christmas/birthdays.

Basically, I use my Freedom Account for any expense that I KNOW is coming; the Emergency Fund is there for the stuff that might come, but can't be predicted.