Financial Tools / Capital Fund
Usually, individuals do not plan to pay cash from savings to buy items such as cars, refrigerators, stoves, furniture, appliances. They buy them as needed, normally using credit cards or lines of credit. Similarly, to repair or replace these objects, people use funds from the household budget. They forgo other stuff—they borrow. This erratic asset maintenance and replacement is stressful and expensive. It is much better to create a nest egg, targeted savings, you can draw on to buy these items you decided to buy. This is a sure way to live a debt free lifestyle.
The capital fund is the credit card alternative. You buy stuff from savings you plan for these specific items. The capital fund is part of a debt free lifestyle. It mimics depreciation, an established business practice that provides systematically for regular replacement of equipment. It is akin to capital budgets of businesses. And it compliments your operating budget. Simplistically, to replace an item costing $1000 with a ten-year life, corporations would set aside $100 yearly for ten years. At year ten, they replace the item and repeat the procedure. Imagine interest you would not incur if you had a credit card alternative that allowed you to pay cash for everything except a home—using a credit card and paying the full balance monthly counts as paying cash.
Individuals and couples I counsel, and who attend my seminars, testify repeatedly that their capital fund had a significant positive effect on their finances and stress levels—it was the single most important tool that contributed to their debt free life style.
Encourage children to start a capital fund. Model this debt free lifestyle for your them. They should get a clear picture of how to live this debt free lifestyle. You can tell them what's involved, but they need to see you living debt free. Teach your children to build savings and then spend from these savings for specifc previpusly agreed items.
If you did not start a capital fund as a child, start when you repay all consumer debt. Remember, do not wait to be debt free before you start the debt free lifestyle. Adults, save to pay cash for items such as these:
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. Your capital fund earnings might 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 non-essential items 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. In Canada, the Tax Free Savings Account (TFSA) is the perfect vehicle for a capital fund.
At your next salary raise or when you get extra funds, ask the Lord to show you how to divide these extra funds; specifically, how much to 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 advisor who does not sell financial products. Still, 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. And ensure you 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 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. Remember, your goal is to keep these items out of your yearly budget. Each person must decide the minimum cost of each item he or she will include in this account.
Here are thoughts for an individual and for a couple:
Review your lifestyle and your capital fund yearly and adjust as need. Revert to the debt free lifestyle if you strayed; review and change monthly contributions only after thorough evaluation and prayer. Read Genesis Chapter 41 before this review, which should address questions such as these:
These are two major challenges to starting and continuing a capital fund: First, how do you get information and motivation to prepare the first items' list and amounts to save? Review your earlier spending and think about future needs. That's the best you have. Second, once you start a capital fund, how do you keep the discipline to set aside funds monthly without exception? Only by God's grace. Ask Him to give you insight and discipline to honour 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:
You can save and restore incomplete or completed work on the Capital Fund Calculation Form (Form) by clicking the "Save Your Work" button below. A file "capitalfund.mgm" is generated and can be opened only by clicking the "Restore Saved Work" button. You cannot open it by clicking the file. As well, you could save information to a spreadsheet to record spending against this plan. After you are happy with your inputs to the Form, clicking "Save to Spreadsheet" will generate seven spreadsheets. The first is an exact copy of the Form, and will look like
this. The other six spreadsheets allow you to record actual spending against the plan yearly for six years.
Monthly, the amount to save will be added automatically at the top of the spreadsheet based on inputs on the Form. The first month's savings will be the month you start to save in the spreadsheet. At year end, the balance is transferred automatically to the following year and the cycle repeats.
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Before you implement financial decisions, consult an Independent Financial Advisor. Scripture quotations, unless otherwise noted, are from the New International Version (NIV) of the Bible (Copyright © 1973, 1978, 1984 International Bible Society. Used by permission of Zondervan Bible Publishers. All rights reserved.)