Seven essential financial questions: No. 4

(Editor’s note: This is the fourth of a seven-part series.)

I have created a basic financial planning process using Seven Essential Questions as the foundation. Why only seven?

The answer is simple. I have conducted thousands of planning meetings over the past 20 years and have discovered that while most people know they should have a financial plan, they are often overwhelmed by the thought of even starting to create one. It seems like something that will take many hours and be painful or boring. I find that by breaking down the process into answering these Seven Questions, we are able to build a framework for a financial plan that is comprehensive, yet simple enough to implement.

Essential Question #4: Do you have a system to save money for short-term projects?

Let’s start this section by defining a short-term project. It is any expense that you want to be able to pay cash for within the next five years. For example, my own short-term project fund includes saving for a new car, home improvements, a vacation, and college for our oldest child. I mention college because it highlights how a project can start out as a long-term goal, but once the goal is within five years it becomes a short-term project.

You can have as many of these short-term projects as you want and are willing to keep track of. I have found the more short-term project categories I have, the easier it is to use the emergency fund only for emergencies.

Obviously, you will not have a separate bank account for each project. You will have one account that holds money for all the various projects. You can use a notebook or computer spreadsheet to keep track of the amount going into and out of each category.

For example, if you want to have $5,000 in the vacation category to be spent in a year, you need to put 1/12 of that, $416, into the project account each month. I prefer to have the project fund set up at the same bank where I keep my regular checking account. This allows me to easily move money as projects are paid for.

Adding money to this project fund is a budget item on your regular monthly budget. Each month you will move money into your project fund and keep track of any spending that was done the prior month.

Using the project fund is much better than using credit card debt because it helps keep you from paying interest costs, which is covered in more detail in the next section.

Key concepts:
1. Short-term projects are less than five years in duration.
2. Each project balance is tracked in a notebook or spreadsheet.
3. The use of the project fund prevents the need for debt financing.