Five Good Reasons to Have Sinking Funds

Can you imagine a Christmas without regret or not worrying about a major upcoming expense?

I can…

I have!

If you’ve read the past two installments of my blog, you might say, “I know, use your emergency fund!”

Nope.

You need a sinking fund, really a couple of sinking funds. There is a big difference between the two kinds of funds.

Emergency Funds and Sinking Funds

Emergency Funds: An emergency fund is really a small savings account that is used exclusively for emergencies.

A good way to understand an emergency, as I outlined  in my last post, must meet the following three criteria:

  1. The expense must be unexpected – it should not be a planned cost.
  2. The expense must be necessary – there must be a real NEED for this expense.
  3. The situation must be urgent – something bad will happen if you do not spend the money in this way.

An uninvited guest showing up for dinner, a sudden birthday party, Christmas sneaking up on you – none of these fits the criteria for using money in an emergency fund. Some of these might be better covered by the sinking fund.

 

OK, I’ll bite. What, then is a sinking fund?

Simply put, a sinking fund is a strategic means of saving for an expected expense. If you are in debt, you want to limit the sinking funds to things that are absolutely necessary, but save in a way that will keep your situation from becoming urgent. Following are five really good uses for sinking funds, uses that will ease your fear of financial hardship and allow you to experience events without regret too!

  1. Christmas/Holidays/Birthdays
  2. Tax Bills
  3. Trips/Vacations
  4. Car Repair/Replacement
  5. Other Major Expenses

 

The Beauty of a Sinking Fund…

Gift Giving: For YEARS, my wife and I would rack up serious credit card debt to pay for Christmas. Last year, every gift we gave for Christmas we paid CASH!! Think about that. By planning, and having a small amount of money we paid ourselves what we would have paid the credit card company, we had all the money we needed for the holidays. As a result, when we gave the gifts, we were not left with the bill to pay! We were actually giving freely! What a great experience!

All you have to do is figure out how much you want to spend on gifts throughout the year and divide that number by 12. That would be the amount you need to save each month to ensure that you have what you need for giving gifts.

Tax Bills: Last year, I started setting aside $80 per month to cover sewer and car bills. As a result, in January and July when those bills came it, all I had to do was to take the money out of the envelope and pay the bills.

In setting up my tax fund, I actually calculated the monthly amount over 11 months instead of 12. I did that so that I would have a one month tax holiday… that is my tax fund was full in November so that I would not have to pay into the fund in December.

Trips and Vacations: My daughter joined the Army right out of high school. Being there to witness her graduation, to celebrate her accomplishment was our goal. Through my side hustles and cost cutting in a few areas, I set up a sinking fund for the trip. It cost us $3500 for the parking, airfare,¬† hotel, rental car, and food while we were there. I used plastic …. my debit card for everything. That’s right, a week away with no debt incurred. In fact, not only did we not incur debt, but we actually had money left over. So much so, that we were able to pay cash for her to fly home for her visit this Christmas!!

Car Repair/Replacement: I have a reliable car, but things happen… things like oil changes, flat tires, brakes. So, I set aside $100 to $150 per month to hedge against an upcoming need. There have been a few times in the last year, when all I had to do was go to my car repair envelope and walk, with cash into the garage. Can you imagine? No stress with a broken car?

Other Major Expenses: There are any number of other things that one might want to save up for:

  • Replacing Appliances – my furnace is getting old. I already have 1/2 of the cost saved!
  • A new roof or siding
  • A new driveway
  • Costs associated with having children or adopting

I can tell you from my own experience, as well as the experiences of some of my clients that nothing feels as good as having costs covered. It’s wonderful when you have planned for upcoming expenses. So that you don’t fall into the urgency/emergency cycle.

It’s never too late to set up sinking funds or to work on developing a solid budget.

If you haven’t started really budgeting, or if you have and using these kinds of funds is new to you, please call or email me. I’d love to talk to you about how to move you forward, to help you win with your money!

 

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