Capital Fund

Do you want to be debt free? Find a means to pay for major non routine expenses without borrowing! That's why I developed the Capital Fund. Like depreciation expense in a business, it represents savings geared toward buying specific items or services at a certain or uncertain future date.

I distinguish regular savings from the Capital Fund. Regular savings refer to your retirement. They represent your supplement if needed, of your estimated pension income from your employer and Government's pension plans. Ideally, you will save to fill the gap you identified in your retirement planning: the difference between your current estimate of income at retirement and your current estimate of expenses at retirement. So, if you estimate to get $1000 each month from your employer and Government's retirement plans combined, and you estimate your expenses then at $1300, you would save enough to get $300 each month during retirement. This is not as daunting as it appears. Talk to an independent financial adviser to help you carry out this exercise yearly.

The Capital Fund & Debt Free Living

The Capital Fund represents a plan to avoid getting into debt by saving orderly for specific expenses, which timing we cannot predict accurately.

Usually, individuals do not plan the timing to buy expensive items or save to pay cash for items such as cars, refrigerators, stoves, heat pumps. Rather, they buy them as needed, normally on credit. Similarly, to repair or replace these objects, sometimes folks use funds from the household budget, which means they must forgo other stuff. Most of all, they have to borrow. This erratic asset maintenance and replacement is stressful and expensive.

The Capital Fund is part of a debt free lifestyle. It mimics depreciation, a practice of well-run businesses that systematically provides for regular replacement of equipment. It is also akin to "capital budgets" that companies use. Simplistically, to replace an item costing $1000 with a ten-year life, companies would set aside $100 yearly for ten years. Then they replace the item and repeat the procedure. Imagine the interest you would save if you paid cash (including using a credit card and paying the full balance monthly) for everything except a home!

Individuals and couples I have counseled, and who have attended my seminars, testify repeatedly that using a Capital Fund had the greatest positive effect on their finances. You need a Capital Fund to become and remain debt free!

The Capital Fund & Children

The Capital Fund is ideal for children: set aside at least 50% of funds you get for them from grandparents and other extended family members. As they grow older, encourage them to continue this practice, by saving, after giving to the Lord, for specific items. Don't give them loans, but encourage them always to save to buy what they need. Be an example to them-follow this path! At a suitable age, which will vary for each child, develop with each child, the Capital Fund's purpose, such as paying cash for the following:
  1. Education expenses-remove the need for student loans
  2. Engagement and wedding rings
  3. Down payment on a home
  4. A car, computer, and other items with a life span greater than two years
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Starting a Capital Fund

If you did not start a Capital Fund as a child, start when you repay all high cost consumer debt. For adults save to pay cash for items such as these:
  1. Down payment on home: get a down payment large enough to avoid mortgage insurance
  2. A car, including major maintenance
  3. Major spending for items such as, a fridge, stove, furniture, and major repairs on these and other items
  4. Emergencies expenses-three to six month's wages
  5. Raise as high as allowable, insurance deductibles-this has major potential to lower insurance costs, but you must only do it if you understand the full implications. For example, you could save here to avoid buying extended warranties. But you must save regularly to have cash to pay for needed repairs! Further, you may consider raising deductibles on your car and house by building this section of the Capital Fund. Again, you must recognize the need to save regularly for repairs and maintenance.
Why start a Capital Fund only after repaying all debts except your mortgage? Your Capital Fund will earn little income because you should keep it in a secure account. But, your consumer debts will bear high interest costs. For example, the spread between what you could earn in a well-managed Capital Fund and interest charges on consumer debt, could be over 20 percentage points. In other words, your Capital Fund earnings may be 3% yearly, before taxes, compared to consumer-debt interest charges of 29% yearly after taxes!

The temptation to neglect the Capital Fund will be great. Urgent but nonessential items that you believe you must buy will arise. Don't give in to slick, seductive advertising or offers of cheap financing! Seek God's direction! Stay focused, and save monthly according to God's guidance.

Avoid the other temptation: to invest the Capital Fund in stocks or bonds which are longer-term investments, not suitable for targeted savings. The state of the economy and stock market affect the value of stocks and bonds. Besides, you do not know when you may need to draw down your Capital Fund to repair the car, replace the stove, or other emergency! Remember, you may need to withdraw funds from your Capital Fund at short notice. So keep these funds in an easily accessible account where the amount you deposit, will not be at risk.

At your next salary raise or when you get extra funds, ask the Lord show you how to divide these extra funds; specifically how much you should put in the Capital Fund.

Most of all, decide not to buy items on credit; use your credit card only as a check. Get advice from an independent financial adviser who does not sell financial products. Even if you have the funds available, before spending, use the Affordability Index as a guide. If you don't use this procedure, ensure you follow a similar practice before spending. Most of all, ask God to confirm the spending decision.

Identify items to save for and fill in the form below to decide how much to save monthly. The amount to save should be your best estimate of the today's price. So $7,500 for the car would be your estimate of today's cost of the car you will buy in five years. A rough guide to decide if you should save for an item in your Capital Fund is the frequency of replacing or repairing the item. I recommend you save for items with life cycles over two years, or expenses that recur at least every two years. In other words, you would not include these expenses in your yearly budget. Each person must decide the minimum cost of each item he or she will include in this account. Top^

Yearly Capital Fund Review

Review your Capital Fund yearly. Read Genesis Chapter 41 before this review, which should address questions such as these:
  1. Should you add or delete items?
  2. Should you change the planned timing of future expenses?
  3. Did you use realistic prices to calculate the spending amount?
Adjust monthly contributions only after thorough evaluation and prayer.

These are two major challenges to starting and continuing a Capital Fund:
  1. How do you get information and the drive to prepare the first list of items and amounts to save? Review your earlier spending and think about future needs.
  2. Once you start, how do you keep the discipline to set aside funds monthly without exception? Ask God to give you insight and discipline to honor Him with handling His finances.
If you decided to save to buy a car for cash, here is an example of the monthly Capital Fund calculation:
  1. Estimated cost today of a specific car = $7,500
  2. How long before you replace the car = 5 years
  3. Amount to save yearly - $7,500/5 = $1,500
  4. Amount to save monthly - $1500/12 = $125
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Capital Fund Calculation Form
Description Amount to Save # Years When
Fund Needed		 $ To Be Saved
Yearly		 $ To Be Saved
Monthly
$ $ $
$ $ $
$ $ $
$ $ $
$ $ $
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Copyright 2002-2008, Michel A. Bell, (michelbell@managinggodsmoney.com). All Rights Reserved.
This site is solely for information. Each person and family's situation is different and needs to be looked at separately and in context.
So, before you implement any financial decisions, ensure you consult an
independent financial advisor