Our Biggest Budgeting Mistake of 2011

I know we made a lot of mistakes with our finances in 2011, but there is one that I’ve been thinking about a lot lately. Certainly, we don’t have a perfect financial situation.  We’re always trying to find ways to manage money better and to ultimately be better stewards of God’s resources. Perhaps you can relate to some frustrations I often feel…not enough savings, (we’ll need a new car in the near future and not enough savings for it) and the emergency that lurks around each corner that will knock your savings balance back a few months until it can be replenished.

For some reason I thought we could budget last year without paying attention to some of the details.   Boy, was I mistaken. In the past we’ve been accustomed to having what we call a “Freedom fund”. I believe this concept was originally introduced by Mary Hunt and can be a separate savings account or budget category that provides financial freedom for those once a year, or irregular expenses, that seem to creep up at the worst possible time. The idea is you save for these expenses throughout the year and draw from the freedom fund when you need to spend on them. Example expenses might include Christmas gifts, birthdays, HOA dues, yearly vet visit, mother and father’s day, oil changes, other car maintenance, vacations, etc.

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As I mentioned, we didn’t have a freedom fund this year. Nope, for some odd reason I figured we could just handle those expenses with some surplus in our budget each month and pay for them as needed, etc.  I know that’s a bit free flowing for me since I’m a details guy and usually very conservative with managing money. I remember my wife asking me several times:  “didn’t we budget for that?” She was accustomed to past reviews of the family budget in which we identified all these expenses. “No”, I said. “We’re just paying for them with surplus or extra money in the budget each month. We have some extra money and we’ll just pay for them when needed”. Anyway, this got me into trouble by the end of the year when we had to draw from emergency savings to cover the shortfall.

Unfortunately, we had no monthly conversations about these expenses, so we didn’t track them or plan for how we would fund them.  We didn’t budget for them each month so it was easy to spend more on certain things than planned, which is ultimately where I think all this went wrong.  Without the budget, we couldn’t see how we were doing throughout the year. You know…no ability to stop, strategize, adjust spending priorities, etc.

So, this year we’ve reintroduced the freedom fund category back into our budget. We have several subcategories in this freedom fund in which we have a yearly total budgeted for the fund. We’ve divided that yearly total by 12 and will be budgeting monthly for each expense. When one of these expenses presents itself, we’ll draw from the freedom category and track the spending. Yes, certain subcategories will go negative because we won’t have saved enough for them by the time the expense is due. However, the balance of the freedom fund category, as a whole, should cover us as long as we don’t spend more than budgeted. We don’t have enough money to fund the freedom fund category a year in advance.  But, that’s okay. If we stick to our freedom fund budget, talk, strategize, adjust spending priorities as needed (if something is more expensive as planned) we’ll end the year with a balance of zero which means we met all of our expenses.

Will this be perfect? Probably not. However, this is proactive planning and budgeting and where I think you might agree the detail matters. The beauty is our freedom fund should get smarter. We can add new expenses that we forgot or that come from life changes. But, I’m determined to follow the freedom fund budgeting process more diligently in the future because I believe it’s going to protect our emergency savings we’re trying to grow this year.

What do you think about the freedom fund? Have you used this method for budgeting irregular expenses? And, do you have any budgeting mistakes from 2011 we can all learn from? Please share in the comments.