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.
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