Reduce Your Stress With Sinking Funds

The following two tabs change content below.
Jonathan graduated with a degree in Business Administration from Ouachita Baptist University. He also holds a Masters in Business Administration from the University of Texas at Arlington. While he works for a contractor buying specialized tools, his passion is personal finance, frugal living, blogging, and stewardship.

Have you heard of “sinking funds”? Basically, they’re funds people set aside for expenses such as purchases or bills we all know we will have in the future. This is something you work on once you have set aside money for an emergency fund.

I. Making a Purchase with a Sinking Fund

Paying-with-cash-blog

How do we do this? We save a small amount each month for a set time before making a purchase or paying a bill. You take the total amount to be spent and divide by the number of months you have let until you want to make the purchase or need to pay the bill.

For example let’s say you’d like to budget $500 for Christmas gifts. Starting in July you’d save $100 a month into your sinking fund. By December you’d have saved up your $500.

II. Paying a Bill with a Sinking Fund

Pay a bill

What about a re-occurring bill? Let’s say the cost of car insurance is $600 for 6 months. So you’d save $100 a month as soon as you pay for the last insurance coverage. We do this on a regular basis and have learned that paying every 6 months we can get a discount of say $50 from our car insurance provider.

III. What categories of Sinking Funds do we personally have?

sinkingfunds

Probably if you’re still working on building your $1000 emergency fund or paying off your debt with the debt snowball maybe 2-4 categories of sinking funds might suffice. That said, we have about 10 savings accounts through our bank that we save money on a monthly basis for:

1. Emergency fund
2. Sinking Fund: New Car Purchase
3. Sinking Fund: Other Purchases
4. Sinking Fund: Gifts
5. Sinking Fund: Son College
6. Sinking Fund: Daughter College
7. Sinking Fund: Car insurance – paid every 6 months
8. Sinking Fund: Vehicle Repairs
9. Sinking Fund: House Maintenance
10. Sinking Fund: Vacation
11. Sinking Fund: Baby Fund* (Now Health Insurance Deductibles)

*Currently we’re not using this category

IV. Sinking Fund Vs. Emergency Fund?

Difference Between Emergency Fund and Sinking Funds

A sinking fund is different from an emergency fund. A sinking fund is a planned (purchase) or re-occurring (bill) expense. A sinking fund is a known expense. So, you might make a purchase of new patio furniture. Or, you might pay your car insurance every 6 months.

An emergency fund on the other hand is set aside for unknowns. Examples of emergencies might be the need to go to the doctor or an appliance might need to be replaced. An emergency fund is critical to good financial health and financial freedom. Growing up in our household we called this a rainy day fund. It’s going to rain eventually.  An emergency fund is like an umbrella that covers your family when it does rain.

V. Recap of Sinking Funds

revisedRECAP

Sounds pretty easy, doesn’t it? Sinking funds are a rather simple concept. Save money for purchases and bills you know you will have in the future. Sinking funds require patience and discipline. We live in a culture that promotes the idea of buy now and pay later. Often when you pay for things in cash, you can get a discount.

So decide what categories of sinking funds you will use and put them as line items in your budget. This will result in less stress. Who couldn’t use a little less stress?

***

What sinking fund categories do you use or do you plan to use?

Lets Connect with Social Media!

Visit Us On FacebookVisit Us On PinterestVisit Us On TwitterVisit Us On Google PlusVisit Us On LinkedinCheck Our Feed
About Jonathan Key 112 Articles
Jonathan graduated with a degree in Business Administration from Ouachita Baptist University. He also holds a Masters in Business Administration from the University of Texas at Arlington. While he works for a contractor buying specialized tools, his passion is personal finance, frugal living, blogging, and stewardship.

2 Comments

  1. Great post about the differences between sinking funds and emergency funds! We use sinking funds all the time for many different categories just like you and are able to get a discount on many things by saving up to purchase and being able to purchase 1 year ahead as well!

    Categories we use ours for includes: vacation, clothing, auto insurance, yearly association dues, home repair, entertainment, blow money aka fun money, auto maintenance, gifts and babysitting money.

    Once we finally learned how to make the sinking funds work for us, it has really turned what we thought were emergencies into plain monthly bills that we are ready for.

    • Steve thank you for your comment! Seems like we have a lot of the same categories. Yes, it’s amazing how when you show people cash at a store you can negotiate a better deal. Between the emergency fund and sinking funds are lives are less stressful for sure!

Leave a Reply

Your email address will not be published.


*


CommentLuv badge