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One of my favorite tools in my financial arsenal is my sinking fund. It allows me to have money available for future planned expenses without ever having to worry about where I’m going to get the money for things. Sinking funds are adjustable, so you can use them to plan ahead for any large expenses.
We’ve taken a few steps so far to get to this point. We’ve picked the kind of budget we want to use. Personally, I’d go with the zero based budget, so that’s what I’ll be using for all my examples. We’ve discussed removing debt, it’s only going to weigh us down. We talked about starting an emergency fund, and though the emergency fund may not be fully funded at this point, it’s time we set up a sinking fund so we don’t have to pull from our emergency money.
Just like we did with emergency funds, let’s define what a sinking fund is – a sinking fund is money you put aside for future irregular expenses. Some examples of irregular expenses are: your car insurance bill, if you elect to pay it every 6 months; home or car maintenance; doctor or dentist appointments; a holiday gift fund; or even your tax bill, if you’re self employed. These are bills that you’ll pay at some point throughout the year, but not necessarily on a monthly basis. Your car insurance bill may not be due for 6 months, but you’re still going to want to have the money set aside to pay it when it comes due. This is how we do it.
In order to set up your sinking funds, you will have to assess your previous year’s expenses. Like we did in episode 1, “A financial foundation for the future” we need to gather our bank and credit card statements. What irregular expenses did we have last year? Find anything that isn’t a normal monthly expense. To find your minimum irregular expenses for the entire year, make a list and add them together. This is your yearly sinking fund number. A goal to reach to build the next tool in our arsenal. Take the yearly total and divide by 12 for each month of the year. This is your monthly sinking fund number. The idea is to pay yourself this amount every month to help keep ourselves afloat when those particular expenses arise. Since we’re “paying” ourselves every month, the sinking fund will continually be replenished. When I say “pay yourself,” I simply mean transfer the money to a different account to pull from when needed. I use the savings account my bank gave me when I set up my checking account for my sinking funds. As for my emergency fund, we talked about using a separate online high yield savings account to keep the money out of reach, so we’re not tempted to use it.
Sinking funds are versatile and can be used for any kind of future expense, as long as you know how much you will need for it when the time comes. I like to include extra things like clothing and video games in my sinking funds. I’m pretty frugal and don’t spend much on clothes and games. I give myself a limit of how much I allow myself to buy in a year, and I set aside a small amount each month through the sinking fund. This way, I don’t feel guilty when I want to buy something for myself.
Question of the episode:
Do you use sinking funds? Are you going to start a sinking funds budget, now that you’ve learned about them? I’d love to hear from you, so please leave a comment below.