In Genesis 41, we read about the story of Joseph and Pharaoh. Pharaoh has a dream, and Joseph is able to interpret the dream. Egypt is to experience seven years of plenty to be followed by seven years of famine. Pharaoh appoints Joseph as governor to implement a plan to navigate the country through the challenges associated with the years of famine. What did Joseph do? He set aside excess harvest during the years of plenty in order to provide during the years of famine.
Joseph’s example provides a lesson for all of us. While it might be easy to say we would save for the future if the Lord provided us a dream as he did for Pharaoh, the reality is, we do know of many probable future obligations, yet we fail to save for them as Joseph did. Here are just a few examples — consider which of these apply to you:
◗ Emergency and rainy day
◗ Replacement vehicle
◗ Home improvement and repair
◗ Children’s weddings
◗ Children’s/grandchildren’s college
◗ Inheritance for children/grandchildren
What do these have in common? They will happen in the future, and because of that, it’s easy to avoid factoring them in to how we spend money today. But when you fail to save ahead for these items, you’ll end up borrowing to pay for them, and that borrowing will be an impediment to reaching your long-term financial goals.
Reserve fund needs
What’s the solution? An approach to saving that I call “reserve fund management,” which will revolutionize your financial life. The concept is straightforward. You make a list of the items you should be saving for based on a review of your life plans. Then you build an appropriate level of savings into your annual spending plan in order to fund those future obligations.
The key is to build the savings into your current cash-flow plan, actually set the money aside, and only spend today what is left over. This means you really don’t have as much money available to spend today as you thought you did before factoring in these needed reserve funds. Recognizing that and changing your spending habits is a key to making the reserve-fund system work.
Here is an example of how you build the required savings into your cash-flow plan. Let’s say you have home improvement projects that you’d like to save for so you can complete them four years from now. You anticipate spending $25,000 on these improvements. You get paid every two weeks. That’s all the information you need in order to know how much you’ll have to save if you want to pay cash for the improvements. The calculation goes like this:
Anticipated timing of purchase: 4 years
Estimated purchase price: $25,000
Annual savings required: $6,250
Paycheck frequency: bi-weekly (every two weeks)
Amount to be direct deposited into “Reserve Fund” every pay period: $240.38
By following this simple approach you’ll have set aside the $25,000 you need to make the home improvements in four years, and you’ll have done it without borrowing!
Types of accounts
I suggest holding reserve funds in one brokerage account. Due to the short-term nature of emergency and rainy day funds, they should be kept in liquid money-market funds. Medium-term savings such as auto and housing funds can be invested in CDs or high quality short-term bonds within the same brokerage account. Through the use of a simple spreadsheet, you can track the balances and activity of each of the reserve funds.
When it comes to funding college and retirement, use separate brokerage accounts since you’ll want to take advantage of tax-favored investments. Use the calculators at www.veritasfinancialministries.com to help determine how much you need to save today in order to meet your higher education and retirement goals tomorrow. God love you!
Phil Lenahan is the president of Veritas Financial Ministries (VeritasFinancialMinistries.com) and the author of “7 Steps to Becoming Financially Free” (OSV, $19.95). Submit questions for columns to firstname.lastname@example.org.