What’s that you say? Sounds like an oxymoron (a what?). OK, got your attention? Read on. It’s important. If there’s one thing I wish Dave Ramsey would rant about more (I love his rants), it’s the importance of having a sinking fund. This is the account where you save each month to pay for those large and infrequent but predictable purchases that would otherwise blow your whole budget and become an emergency when it comes time to pay for them. Car insurance and car repairs are two big ones that I hear people freak out about. Christmas shopping is right up there too (who KNEW it always comes in December?). So this is a 2 part series about how to set up and use a sinking fund. This first article is to convince you that you need one, and to get you thinking about the items you should be saving for in your sinking fund. The follow up article will give you more detail about how to set it up, use it, and do the accounting to keep track of it. I think the sinking fund, for many people, could rival or even surpass the emergency fund as the most important part of their financial plan. When people call me for advice, it’s often a crisis that prompts them to pick up the phone and ask for help. Some huge expense is looming and they have no emergency fund or other savings to cover it, and they’ve maxed out their credit cards paying for other so-called emergencies. And more often than not their crisis is something that should have been at least somewhat foreseen, if not precisely predicted as to timing or amount.
With proper planning, true emergencies (aside from job loss) are really pretty rare (things like…hmmm, let me think....the sudden death of a relative that would require travel expenses for the whole family to attend the funeral…sorry to be morbid but that’s how far I had to go to think of a real emergency).
Having a sinking fund will give you confidence with budgeting and a lot more peace of mind. The month-to-month and day-to-day budgeting task is not nearly so daunting when you know you’ve got the big ticket budget-busters already taken care of and that surprises are very unlikely to pop up. So what kind of things should I save for in my sinking fund? THINGS EVERYBODY NEEDS TO SAVE FOR:
Tires (this is another top item people forget about)
Major car repairs
Major house repairs, or things like a new furnace (unless you’re renting)
THINGS YOU NEED TO SAVE FOR IF YOUR HOUSE IS PAID OFF:
Annual property taxes (local, county, school – that school tax is a biggie!)
Umbrella liability insurance
Taxes and insurance on a rental property or vacation home
THINGS YOU ONLY NEED TO PAY FOR ONCE OR TWICE A YEAR, OR EVEN LESS OFTEN:
Fuel oil, propane, or coal for your furnace
Furnace or air conditioner maintenance
THINGS THAT ARE UNIQUE TO YOUR FAMILY'S NEEDS:
Unusual and ongoing medical expenses
Things I couldn’t possibly imagine since they’re unique to your family. Odd ones for us are the replacement filter for our drinking water (it includes a UV light and costs a couple hundred dollars), and our legal representation service for concealed carry permit holders, also a few hundred dollars.
ANYTHING YOU COULD PAY FOR LESS OFTEN THAN MONTHLY AND THEREBY SAVE MONEY IN THE LONG RUN:
I also would have a totally separate sinking fund just for buying your next car, only because it is such a large purchase. Having its own account keeps a certain level of importance attached to it that will increase your focus on saving for it. And it makes it less likely you’ll rob from that account to pay for other sinking fund items, which will be a huge temptation as the car savings builds up to a nice fat sum. Same would go for things like your daughter’s wedding, and for some people even vacations deserve their own account (I DO hope you’re out of debt if you’re going hog wild on vacations though!) What NOT to put in your sinking fund:
In short: anything that is a monthly expense, and has to remain that way, no matter how much it costs, or infrequent items that are below a certain dollar threshold. You decide the threshold – what size expense makes you gasp when you learn you have to work it into this month’s budget? $100? $300? 500? Decide on a figure and stick to it – anything you could predict that would be over that figure needs to have its own line item in the sinking fund. WARNING, WARNING, WARNING:
Do NOT use your sinking fund as an excuse to save up money for things like clothes or other personal items so that you can go on a big spending spree someday. That is a sure way to defeat the whole purpose of your budget – you surely have more important things to allocate that money to on a monthly basis, like paying off debt or investing more for retirement.
If you were wasting money or overspending on a certain category before you started budgeting, it will not be helpful to just start saving up that same amount for less frequent but even larger spending sprees. When you need (or want, if you’re out of debt) a specific item that is below the threshold you set, work that item into your monthly budget when it makes sense.
Don’t budget a set amount every month for something you don’t really need every month (clothing is a good example) and then find yourself one day saying “Oh lookie at all the money I can spend on XYZ that I haven’t been using in my budget over the last six months. Now I can go hog wild at the store.” BAD IDEA. In the long run you’ll look back and wonder why you haven’t made much progress on your important goals like paying off debt or increasing your savings. Next installment: the nuts and bolts of setting up and using the sinking fund.
Feel free to contact me at www.moneycoachbev.com with any questions in the meantime.
Fix your money, Fix your life. I’ll help you.