What are they? How do they work? How do I start?
You may have a lot of questions, or feel it is another complex budget topic, but I promise it is not complicated in the least. In fact, you are probably already doing some form of working with sinking funds right now, even though you may not call it that.
Picture it: Your child comes home from school excited they’ve made the band. As you read over the packet sent home, what jumps out at you is the $250 the school wants over 3 installments in the next 7 weeks. You begin mentally calculating how this is going to affect the next couple of bills and what may need to be shifted to make sure this gets paid on time.
Sinking funds work in much the same way. A sinking fund is a fund/account/bucket that you have set aside to pay for specific items. There are two main ways you can plan your sinking funds, and I use both of them.
Option 1: A catch-all, with no set amount
Everything you decide to set aside for this option goes into one pot, or bucket of money, and you pull on it as you need it. I use this option for my auto repair and auto maintenance. Every time I get paid from one of my side gigs, 20% goes into this account. The eventual goal is to be able to pay for all of my auto-related repairs and regular maintenance from this account. Right now I can pay for my next oil change out of this sinking fund. Baby steps.
Option 2: Planned and /or Irregular Expenses
I have expenses that need to be paid annually, but you can also use this method for something needing to be paid quarterly or semi-annually. Rather than feeling the brunt of having to make a large payment all at once (especially since you may forget about it, or know that it’s coming up, but keep putting it off and then it’s a mad scramble when you get the email reminder), I decided to put a little bit of money aside each paycheck in order to build up the money so I’ll have it when it comes due.
In order to do this, you need to know the bills that are upcoming, the amount that is due, and when it is due. Note: if you are unable to set aside money for everything, start with what you can do, or start with option 1.
Example: I have Amazon Prime, and on July 1 they are going to charge me $120 for another year of benefits.
- Current sinking fund amount: $11 each pay day (I started in January)
- If I decided to start right now, I would have to save $15 each pay day (I get paid 8 times between now and July 1; $120/8 = $15.)
- For next year, assuming the price stays the same, I would only have to save ($120/23 pay periods) $5.22 per pay check.
As you can see, the longer you have to save for a particular sinking fund, the less you will have to save each pay period.
Don’t be discouraged if you are unable to cover all of your irregular expenses as under option 2, or even under option 1. Some weeks I have only been able to transfer less than $3 into my option 1 sinking fund. Rather than not put anything in it because $3 is not going to help get my oil changed, I just keep plucking along. It’s $3 less that I will have to come up with when it’s time.
Baby steps.