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
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
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?
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?
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
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?