Wednesday, September 19, 2007

Compartments and personal finance

Make Your Nut is an interesting blog that I've been reading recently, and has a great post on compartmentalizing your finances. This is a topic that really resonates with me, as it is such a big factor in the progress that I have made in reducing my debts and building some basic savings.

I've written quite a bit about the value of having a Freedom Account, where you save up over time for irregular expenses such as vehicle service and holiday gifts. This is a perfect example of the kind of compartmentalization that can lead to healthy finances: "I know I can afford to spend exactly $X on Christmas gifts, because that's how much I have saved up."

I think everyone who has made an effort to clean up their finances has probably had a moment when they just knew they were on the right track. For me, this happened last week when I had to take my car in for repairs, and the bill came to almost exactly the amount I had saved up for car repairs. Being able to pay cash for substantial repairs was a huge motivation in "staying the course" with my financial plan, and it was possible because I have compartmentalized my finances.

That's not to say that my compartments will remain static over time, but the basic approach of creating compartments will always be a key component of the way I manage my money.


SavingDiva said...

Congratulations on being able to pay your repair bill with cash. I'm working on getting to that point, but I'm not having an easy time saving cash.

Ms. M&P said...

I'm glad to find your blog!

This is helpful advice. I definitely need a freedom account...this has gotten me thinking about how I'll rearrange my 2008 goals. Thanks!