If you don’t know what a sinking fund is, you are in the right place. If you know what one is but are not using them, you are also in the right place. Sinking funds are a KEY defense against the typical family budget busters.
Sinking funds are a relatively new (within the last year or so) addition to our own family budget. And WOW, I am realizing they should have been part of our lives WAY before this. DO NOT STOP READING UNTIL YOU HAVE A PLAN TO ADD THEM FOR YOURSELF.
What are sinking funds, you ask? Simply put, sinking funds are categories in the budget where you save ahead for expenses that you know will happen. (There is actually a much more technical definition used by the corporate finance world, but we are not talking about that here.) Contrary to what the name implies, a sinking fund does not cause your budget to sink. Rather, it helps stabilize your family budget so that you are not sabotaging it every time a large or infrequent expense comes due.
For example, we all know that Christmas happens once a year. Christmas is not an unplanned or spontaneous event, y’all. So why do we wait until November to start getting money together for it? And then what happens? We can’t find enough, so we use the credit cards to pay for gifts and decorations and special meals. Aaargh!! This is exactly what we are trying to avoid, and unless we stop this pattern, we will be in debt for the rest of our lives.
How to stop the pattern? Start setting aside money in JANUARY for the following Christmas. In other words, create a Christmas sinking fund. Make a category in the budget that is called Christmas, decide how much you want to spend on Christmas, divide that amount by twelve, and then set aside that much money every month. Then when December rolls around, you have 11/12 of the money you need! (Through the course of December you will get the final allotment.) And you can spend it without feeling guilty or without using the credit cards! What a concept! This also means that when you find the PERFECT gift in July, you have money to buy it with. (Just don’t be like me and hide the gift somewhere and then forget you bought it in the first place. True story.)
What about those bills that only come around once per quarter or semi-yearly or yearly? Instead of trying to scrape together the $1000 or more that you need to pay the car insurance every six months, set aside a little bit every month so that you already have enough when the bill comes due. Do you pay your homeowner’s insurance and property taxes yourself? Set up a sinking fund. For us, our life insurance and trash collection are billed quarterly, so those have a sinking fund. The Amazon Prime and AAA memberships only come around once per year — sinking fund. Classical Conversations tuition? –Sinking fund.
Other expenses that could benefit from sinking funds: Vacation. Homeschool curriculum. Birthday and other holiday (like Father’s Day) gifts.
Things like auto and home maintenance, medical, and even an emergency fund are types of sinking funds, except they are not necessarily as specific. You KNOW that you will need money for these things eventually, so you set aside a little every month until you hit a target amount that gets held until needed. Then you refill that account with more monthly payments to be ready for the next time.
Savings accounts for a new car or a home down payment could also be considered sinking funds, I suppose — but I am concentrating more on the everyday stuff for the purposes of this article.
How to make sinking funds work
It is possible to set up a different sinking fund for each specific expense, but I find that rather cumbersome. I do have several specific ones — Christmas, auto maintenance, CC tuition, for example — but I lump all of the non-monthly bills into one sinking fund called, hello, Non-Monthly Bills. Then I add up how much money all those bills will cost me over the course of a year (which means multiplying the quarterly trash bill by four, take note) and divide that amount by twelve. That is the amount I will put into the Non-Monthly Bills sinking fund every month.
It would probably be a possibility to work out a schedule of putting less than that amount in there, because the bills do not all happen at once, so I don’t need the full yearly amount in there at any one time. The trick is to make sure I am setting aside enough so that when the big ones are due, there is enough for them. And that is pretty complicated, and I haven’t figured it out yet. But if you are a number-cruncher and can work that out, more power to you. (And let me know how you did it. LOL.)
For now, I withdraw the monthly allotment for the specific sinking funds in cash and bring that home and divide it into envelopes which are secreted in a place only I know of. Muahaha. I would not make that much interest on them in the bank, anyway. (Because trust me — all you robbers out there who are thinking about burgling my house now — it doesn’t add up to much.) The Non-Monthly sinking fund, on the other hand, stays in the checking account, so that I can easily pay those bills as they arise. It is constantly being built up and reduced as the year goes around.
Yes, it does require a little self-control to not use those funds elsewhere. That is one reason only I know where the cash is kept, lol. (Just bein’ real here, y’all! :-) ) But the temptation to do so fades quickly as you see how wonderful it is to spend money that you have already set aside for that very purpose and you don’t need to use credit cards or feel guilty or be stressed. THAT FEELING IS THE BEST, y’all. And then you become the “We will NOT spend our sinking funds money for anything other than it is allotted for” ninja, so that you can always have that feeling, and the rest is history. Hello, stable family budget!!
How to find money for sinking funds when your budget is tight
Yep, this is tough. You have to bite the bullet elsewhere. You have to decrease the food budget. (Sign up for my 30+ Ridiculously Easy Dinners for Busy Families on a Budget to help you do just that! Put your email in the sidebar!) You have to stop getting Starbucks or stepping in
Loft your favorite store to check the clearance rack. There are probably other ways you can find a little bit here and a little bit there to start setting aside for bills you KNOW will happen. It only makes common sense to do so.
Start with maybe one sinking fund. It could be for the bill you know will be coming due the soonest. Divide how much it will be by how many months you have to save for it and start setting that aside. If you can’t save the full amount, at least save SOMETHING, so that you can go less into debt to pay it than you would have before. Baby steps, people. It’s OK. But then IMMEDIATELY after it’s paid, you start setting aside the amount you need to save every month before it comes due again. And that’s one bill DONE. Then you start another sinking fund for a different expense that causes you to blow your family budget each time it happens.
The difference in my stress level since starting sinking funds is DRAMATIC, y’all. And as I have found out recently, sinking funds are also one more barricade against really bad juju in the case of a job loss or other major emergency. My sinking funds are holding steady so far, but I know if I need money to pay the mortgage or buy food, my last resort could be to dip into them. Will that hurt? You betcha. But better that than the credit cards or worse.
So if you do not have sinking funds in place, start at least one TODAY. You will have money to pay for expected expenses when you need it, your stress will be ridiculously decreased, and you will have one less chance to blow your family budget.