Most people know which expenses they will come across in a month, but sometimes forget about the expenses that happen quarterly, semi-annually or annually until the month they show up. These costs could include insurances or taxes, holidays such as Christmas or Chanukah, or even something that needs replaced such as new appliances, vehicles or home repairs. If you are not careful, these expenses will creep up on you and bust your budget, and this is why you need to use a little tool called a “Sinking Fund.”
A Sinking Fund is used when you set aside money with a name on it (holiday, travel, vacation, new couch) and save up until you have the balance in full to pay that in cash. The process is very simple. You take the balance you will need to purchase something in cash, and then divide that number by the number of months until the purchase. That is the amount you need to save monthly into your sinking fund.
For example, it is May 20th right now, and you usually spend $600 a month on December holidays, but have not saved a cent yet. You should put into your budget $100 a month starting in June to raise your fund up to the $600 you will need to spend. Or if property taxes are going to be around $2,400, while it is possible to just pay that in one month, it can be easily dispersed throughout the year by putting aside $200 each month into a savings account and use it strictly for taxes.
You can also put these funds into envelopes marked with their use (“Europe”, “New Car”, “House Repair”, etc.) but that is up to how comfortable you are with envelopes full of money. I recommend going to your bank, and opening up a no cost savings account and put the money for all sinking funds into there. It is vital to make sure you keep track of how much money in your savings account is allocated to each of the sinking funds you are saving for. I keep a little spreadsheet on my computer with all of my sinking funds, how much is going towards them, and have them automatically added up at the bottom to make sure that the money I say is in the bank equals the amount that is available. Note: If you are doing this, make an extra line item for interest. While it is currently around or below 1% at most banks for a standard savings account, you still will generate a little interest every month, quarter or year depending on how the bank is set up. Free money is great, just remember to put a name on that money as well.
Question: What other opportunities do you have in a year to create a Sinking Fund to soften the blow each month to your budget?