The Sinking Fund, Part 2
Nuts and Bolts....
....so you don’t get screwed up. Sorry for the bad pun.
My first installment was more “why” you should have a sinking fund, and this will be the “how” (the nuts and bolts, so to speak). If you haven’t read that first article, do it now or this one won’t make much sense to you.
Here’s the link: https://www.moneycoachbev.com/post/if-you-want-to-keep-your-head-above-water-you-ve-got-to-start-sinking
So by now you should have a list of things that you will be saving for in your sinking fund. For example, we have about 20 items in ours, as you will see in the picture below. Yep, that’s a lot of items. But once this fund is set up, it’s just SO easy to add another item and save for it this way. I really prefer it to having anything become a budget buster in any given month.
So here’s how to set this up.
I’ve written this assuming you are already using Excel, Google Sheets, or similar spreadsheet software. It’s quite detailed, and will make the most sense if you actually set up the spreadsheet page as you read through this. It will be too hard to remember otherwise.
If this makes your eyes glaze over, then skip to the end, and schedule a complimentary consultation with me and I'll help you.
1. Decide where your sinking fund account will be kept. While it’s not an “investment”, so interest rate is not hugely important, it still makes sense to get some reasonable interest, and I recommend using one of the online-only banks like Ally. Interest rates everywhere are ridiculously low right now (October 2020), but you’ll always get about 10-fold higher interest in an online savings account than you will at a brick and mortar bank.
2. Figure out how your chosen institution will interface with your regular checking account. With Ally, we transfer money into the Ally savings account online through the Ally website, and when it comes time to pay for a sinking fund item, we similarly transfer the money back into our checking account and pay the bill or buy the item.
Some of the other online banks have check writing privileges, thus eliminating the transfer back into your checking account, which is fine too. Just be sure you know how it will work and that you are comfortable with it.
We also have our other savings like our emergency fund and car savings set up with Ally, and the “bucket” feature allows easy allocation to different purposes all within one account.
3. Create a page of your budget spreadsheet to keep track of how much money you have allocated to each line item in your sinking fund. The last tab of our budget is where we do this, and it is cumulative, showing each month’s transfers into and out of the sinking fund account going all the way back to when we started one. SEE PHOTO ABOVE.
In the first column, list the items, each to a cell, starting with the second or third row, to leave a row for column labels. (See photo). Second column label “Cumulative Total”. Then the columns will go by pairs: an "input" column and an "outgo" column for each month. In the pictured example, the last two (rightmost) columns are labeled July 2019 Input and July 2019 Outgo.
Create a row at the bottom and label it “Interest” (as if it were another sinking fund item), and then the next row label “Total”. This row will show you the cumulative total of the whole account, as well as the total for each “input” for a given month and for any “outgo” in a given month. The Cumulative Total column will show you how much of the total in your sinking fund that you have allocated to each item.
4. Each month you will transfer a lump sum of money into your sinking fund. That lump sum will be the sum of what you are saving for all the items on a monthly basis. To decide this, divide the expected cost of each item by the number of months until you must purchase or pay for the item.
For example, we fill our heating oil tanks once a year. Say the total cost for the fuel oil is about $1500, so we save $125 each month for a year in order to make that purchase ($125 X 12 months = $1500).
The exterminator is $107 every 3 months (one of those bills we could handle without the sinking fund, but why bother?), so we put $36 every month into the sinking fund for the exterminator.
Decide the monthly amount for each item in your list. Note that the time frame might NOT be 12 months. For example, if you are starting your Christmas sinking fund in July, then you would only have 6 months to save up for this coming Christmas. Then in January you would reduce the monthly amount, because you then have 12 month to save for the next Christmas.
5. List the monthly amounts for each item in the column marked July Input (when you are doing your July budget). Now copy and paste those same amounts to the section of your budget spreadsheet (probably your first page) where you plan out your July budget (not pictured here). You will need a separate main category in your budget called Sinking Fund where all these items are listed, and where you enter your monthly budget numbers.
Usually the amounts for sinking fund items will remain fairly stable month to month….that’s kind of the point of systematically saving for these things. But you still have the freedom to make adjustments each month based on circumstances and needs.
6. Use the calculation function in the spreadsheet to make each cell in the Cumulative Total column equal the sum of all cells to its right. That way that column will always show you what you currently have saved up for each individual item – this is why it’s important to enter withdrawals as negative numbers.
Make the bottom cell of that column so that it sums all the items in that column and this will show you the amount you have in the sinking fund as a whole. Copy that calculation across that row and you will then see the monthly amount you are putting into the sinking fund as a total sum in each monthly “Input” column.
7. When a sinking fund item needs to be purchased or paid for, remove the money from the sinking fund account and pay for it. Enter that withdrawal in that month’s column marked (for example) July Outgo, making sure to make it a NEGATIVE number in the cell.
I try to make only one withdrawal per month (if needed) to pay for all sinking fund items that will be purchased that month. Often I just combine the Input and Outgo amounts for a given month as one transaction, and make a note at the bottom to that effect. (For example, $2500 total monthly input (sum of all input items), minus $1500 taken out for that fuel oil, means I only put $1000 into the fund, net, this month.)
When you withdraw from the sinking fund, you only need to enter the withdrawal on this sinking fund page, not in your budget. The only thing that affects your monthly budget is the amount you put INTO the sinking fund each month.
8. The nice part about doing it this way is that you don’t have to have every item 100% funded all the time. If I only had $1200 saved up for that fuel oil, I could still withdraw $1500 to make the purchase, and let the amount saved for fuel oil go “into the red” and show negative $300. That’s because there is plenty of money in the account (another reason to save for many items), and most of the items aren’t coming due for awhile, so there’s plenty of time to make up the shortfall on the fuel oil.
9. Don’t forget to enter the amount of interest the sinking fund account earns each month in its own cell at the bottom of the appropriate monthly input column.
10. Occasionally you will want to go in and use one column to “rebalance” (label the column that way), moving some money from one or more item allocation to others, due to changes in what you believe will be owed and when. Just make sure when you do that, that the total at the bottom of that column is zero….no real money added or removed, just juggled around among the categories.
This is a good time to then allocate that accumulated interest to another category where you have a shortfall. That’s all I did in the photo....I allocated the accumulated interest to the Miscellaneous/Car repairs line.
That’s it in a nutshell. Okay maybe a coconut shell.
You nerds like me will have no trouble with this. To others, the above probably sounds like gobbledegook.
But my clients use this system quite easily once I can explain it to them personally. So please don’t hesitate to schedule a complimentary consultation with me at www.moneycoachbev.com to talk about how you can best implement your own sinking fund.
Now go forth and start sinking!