Fun With Funds!

When I was in college, part of my financial aid package was that the school offered me a work-study job on campus. I could earn up to a certain dollar amount in an on-campus job. With my measly paycheck every two weeks, I decided to work on financial discipline. I went to a school where designer daddy-bought handbags were an everyday sighting. Haute couture was at every hallway’s turn. So one night while procrastinating school assignments, I went on a website that sold luxury handbags…just to look. I printed the picture and description from my favorite handbag on the website. I calculated the price of that handbag plus Los Angeles sales tax, and I taped that number to my desk in my room.

With every paycheck, I put a predetermined dollar amount away in a separate savings account which earned interest (albeit, not much). Once that account reached my calculated handbag total, I withdrew the entire amount and bought the handbag!

NOT!

I totally did not buy the handbag. I took the money and invested it in a 6-month certificate of deposit (CD). Then I went back to the handbag website and did it all over again. My friends called my crazy. My mother called me confused. I called it disciplined. Technically, I bought that handbag and several others! But I didn’t actually purchase the purse because purses in your closet do not produce income. Purses in your closet take up space. Certificates of deposit produce interest income and they gave me the same level of satisfaction as buying the handbag.

I don’t deprive myself now (because I work hard at a job and I let myself indulge at times). But those initial “experiments” helped me to develop financial discipline and to value interest-bearing investments rather than giving in to every fashion desire.

In one of the personal finance books I’m currently reading, Living on a Budget, the authors extol creating separate funds (savings accounts or CDs) that you set aside and pour small amounts of money into at regular time intervals. These funds help you to plan for and pay for future expenses – both necessities AND wants.

A good way to utilize a separate fund is to plan for property taxes. For example, put a pre-specified amount of money away each month for property taxes if you own your residence. Property taxes are calculated as 1.25% of the market value of your home. So when property tax time comes around, you won’t feel the hit or the drain on your paycheck or main savings account. You’ve planned for it, you’re ready for it and you can afford it without altering your lifestyle!