For those who might be unfamiliar with what a sinking fund is, it is essentially setting aside money for future known expenses. Christmas is a prime example. We all know it comes in December and by setting aside funds each week/month, it no longer becomes a budget buster. Sounds simple enough, but yet Hubby and I still struggle with doing this.
We are now going into our eighth month of digging out of debt and getting our finances in order. While I am pleased to say that we haven’t taken on a single dime of extra debt, this journey hasn’t been without its struggles. I wish budgeting could be a set it and forget it kind of thing, but at least for us, it isn’t! I have come to realize that we have a lot of irregular expenses.
Our intention has always been to get sinking funds in place. Try as we have, we have not done a good job in this area of our budgeting. We do have automatic savings set up, but it never seems to fail that we are always pulling the money to cover one of these irregular expenses. I feel like this fund is always revolving! Put money in, take money out…and this is why I often think of this account as a revolving sinking fund.
The problem, however, is that we don’t always have enough in our sinking fund to cover the expense and as a result, often need to pull more money from our check. My fear is that there will be a month that no matter how hard we try, we won’t have the ability to cover one of these endless bills. And this is why we need to change how we are handling our revolving sinking fund!
We made it one of our goals for August to increase our sinking fund savings from $50/week to $75/week. I have this setup on auto transfer and view it as a bill we pay to ourselves. The additional $100 per month should cover what we’ve needed to add from our paychecks. While I know that this is what the money is set aside for, I still cringe every time we need to use it. Wierd, I know! I think much of this stems from not ever having money allocated for irregular expenses to begin with. Wasn’t that always the purpose of a credit card? Nope, not anymore!
As I mentioned in yesterday’s post, we are also going to start a “cash sinking fund” for items I like to pay in person. Yes, I do realize I could combine this with our regular sinking fund, but I like the idea of having some of this money in cash. Again, I know, weird! I kind of think of this as an extension to our envelope system. Plus it will challenge me a bit as my intention is to pull this money from what I earn at my part time job.
Time will tell how this all works out. No doubt I am probably making it harder than it is, but hey, I view it as all part of the learning curve! Hmm, does that then make me a slow learner? When it comes to finances, obviously I still have much to learn, so I guess so!
How do you handle sinking funds and how do you keep them separate from your regular finances? I’d love to hear your ideas!
I struggle with this as well as I hate to see the amount diminish even though that is the purpose. I just pulled out 1100.00 to pay my car insurance in full for 6 months and Renters for a year. I could have continued to pay monthly but having 1 less bill to worry about will be worth it…I hope.
We pay ours bi-annually as well. By doing so, we save $75, so it is well worth the savings. I just need to get better at making sure the money is in the sinking fund!
Lucy recently posted…Sinking Funds
This takes some time to sit down and work through, but we categorized everything! From Christmas to school supplies to car insurance to auto repair, auto maintenance, camps, home repair/maintenance, hair cuts, etc, etc. We gave each a yearly amount budget, then broke it down over months. Then, when the check came in, we sat down and moved those funds into a savings account from the checking. I keep track on a spreadsheet every month. We sit down within 24 hours of getting paid no matter what – both of us. Some things still pop up and something there is a lack of money, but we borrow from another account and then build back up. The first year is HARD! We are on our 5th year of doing this, so now we have too much at the end of the year, so then we take the overage and pay off debt.
We were always behind the ball when insurance popped up or we need a new battery in the car. The newer the cars, the lower the repair budget. The older the car the higher. We also budget separately for car registration and inspection.
It doesn’t work perfectly, but we did get better at it. It is tough though – to see that account with all that money, but it is actually allotted for something. I am better with it than my husband is.
You are so right about the first year being hard! Funny, but the difficulties are something that is seldom mentioned in other blogs or articles about getting out of debt. I’m really hoping this gets easier as we learn what to expect with each passing month.
Sinking funds used to be a problem for me too, but after a couple years now of budgeting with YNAB (https://www.youneedabudget.com/), we can predict most of the bigger irregular bills, and allocate money for each of them on a monthly basis.
Have you spent any time reading some of the methodologies behind the YNAB budgeting software? Rule #2 is all about budgeting for those irregular expenses (https://www.youneedabudget.com/method/rule-two/). I highly recommend reading about it. We have the older version of YNAB, but the idea is the same, and I think the new version actually makes it easier to sort out.
How we do it is to have a different category in our budget for all those types of expenses, and each month we allocate a certain amount so that when the bill is due, we have the amount we estimated the bill to be at ready to go. If the bill is $1200 once a year, each month we put $100 in to that category and it can’t be touched by other categories… It’s like having an envelope, but it’s all done in software, not with actually physical money. Obviously it doesn’t always work out, especially at the beginning while you are still building up the sinking funds, but if you have to borrow from one category one month, you just have to make sure to pay it back the next month… And as you progress it gets easier and easier because more and more of the categories will be able to cover themselves… If that makes sense. I’m not sure that I’m very good at explaining it…
Jena recently posted…August 2017 – Financial Update
I will take a look and see what YNAB suggests! I’m really hoping that this “rolling” sinking fund creates enough savings to cover all these irregular expenses. We sure seem to have a lot of them!
This works for us. It may not work for you.
But we have one credit card that only has a $500 credit line. Should an unexpected expense come up, we use this card. I look at when the monthly billing comes to an end, which if done correctly gives us 30 to 60 days to pay it off. In the interim, the 30 to 60 days I put aside enough money to pay the bill in full when it comes due.
Since the card has a low credit limit, we can’t make a mistake and go into debt that we can’t handle. The worse that can ever happen is that we pay it off in two months and incur one month of interest which is minimal.
I looked at the comment above whereby a person paid her whole six month insurance premium in full rather than monthly. All this does is save the $2 a month installment fee, which amounts to just $24. We don’t do that because it’s not good for cash flow. I’d rather pay the two dollar fee and keep as much cash handy in case of an emergency which might cause me to actually reach for a credit card if I’m not fully prepared. Paying $183 a month rather than the whole $1,100 at once is easier on the budget, but that’s just my opinion. Hubby and I categorize the $24 as just a cost of doing business.
However (and there is always an exception to the rule) when it comes time to pay our property taxes, if we pay in installments (two) we get hit with a $160 fee. Ouch! That’s a lot of money. So, we prepare and pay that annual expense in full (around $3700). Double ouch!
Anyway, that what we do here.
Good luck!
I would agree on having the fluidity of the cash flow but my peace of mind comes from having as few bills as possible to pay monthly. We don’t have any CC’s to get us into trouble, we have a very low overhead so I would rather put that 189.00/mo into a Roth or my 401K.
We have a lot of credit card debt to tackle so I agree about not wanting yet another bill!
Lucy recently posted…Sinking Funds
With these being known expenses, I still prefer to set the money aside and be able to write the check or hand over the cash when the bill comes due. Right now I’m not so sure I’d quite trust myself to use a credit card! Thanks for your suggestion as it may help someone else with their struggle!
Lucy recently posted…Sinking Funds
Having problems with it taking , so I hope this works!
This takes some time to sit down and work through, but we categorized everything! From Christmas to school supplies to car insurance to auto repair, auto maintenance, camps, home repair/maintenance, hair cuts, etc, etc. We gave each a yearly amount budget, then broke it down over months. Then, when the check came in, we sat down and moved those funds into a savings account from the checking. I keep track on a spreadsheet every month. We sit down within 24 hours of getting paid no matter what – both of us. Some things still pop up and something there is a lack of money, but we borrow from another account and then build back up. The first year is HARD! We are on our 5th year of doing this, so now we have too much at the end of the year, so then we take the overage and pay off debt.
We were always behind the ball when insurance popped up or we need a new battery in the car. The newer the cars, the lower the repair budget. The older the car the higher. We also budget separately for car registration and inspection.
It doesn’t work perfectly, but we did get better at it. It is tough though – to see that account with all that money, but it is actually allotted for something. I am better with it than my husband is.
I really need to sit down and list out expenses that would be well served by a sinking fund, then start putting money aside for said expenses. I hate being surprised by these (unsurprising) bills every year… which is what happens without fail. Thanks for the reminder and encouragement!
Lack of sinking funds must be a budget breaker for many of us. I hoping by better planning and also committing to having sinking funds, we will follow through with it! Keep us posted as to how you do with yours!
I love the idea of sinking funds, I use them, but not as well as I should. I really want to build up a sinking fund for my car repairs, but I just never seem to get it together. Hopefully, by the end of the year.
I’m really hoping after a full year of budgeting that we will figure it out! Honestly, sinking funds shouldn’t be this difficult!
Thanks for this post, Lucy, I thought it was a good one, and the comments too. I have sinking funds for a few things, but not everything. I know as we get closer to retirement I will need to re-think how I do this. Right now for some things I just use a “life happens” fund. It is something I read about in the column by Michelle Singletary, who is a financial writer for the Washington Post. You keep a few thousand dollars in the fund and it is for things like car repairs, appliance replacement, etc. When you use some of the money, you build the fund back up. It is separate from your emergency fund, that is for things like losing your job, big unexpected medical bills, etc. The “life happens” fund is meant to have money coming in and going out as needed.
We have our own semi-complex way of handling. I have two different budgets – a yearly budget (for irregular, non-monthly expenses) & a monthly budget (groceries, gas, etc). I plan both budgets out several months in advance of the new year. I review previous spending, look for trends, & determine if I need to raise or lower any particular categories. Then I create a “yearly” fund that is intended to cover all irregular expenses for the entire year. I save for these expenses one year ahead. However,things come up (e.g. we bought a house this year & blew through that money for our down payment). My other policy is to always have $10K in our emergency fund, so we can pull from that if a true unplanned for expense crops up. Obviously, some tweaking of your own plans will likely get you to where you need to be – whatever works for you & your budget, but the key is to keep trying & experimenting, and improving on previous years!
That is what I’d like to do. Given this is our first year of seriously watching our budget (and writing it down!), I think it will take us an entire year to figure it all out. Once our consumer debt is paid, I also want to have much more in our emergency fund. Congrats on the new house!
It will get much easier when you have a few years of budget history to consult. It will enable you to anticipate most expenses (barring natural disasters).
Our only debt is our mortgage. I still do finance a car if absolutely needed, but pay that off as quickly as possible. I do still use my credit card for most purchases including work expenses and any “surprises”, but I pay it off every single month without fail. That allows me to build up credit card miles points which I can use toward unexpected items to minimize the hit.
I just cleared the credit card miles to pay for the large unexpected pool repair, which means I had to cash flow the unexpected cancer surgery for my dog, so not a perfect system, lol. We do keep a large chunk in savings for true emergencies.
For me, the trick to using credit cards (once you pay them off, not before), is to log every expense into my budget at least weekly, (more often at the end of the month) and once the budget money is gone, no more purchases for that category.
It works for us, as we have several months worth of needed items stored at all times. We fill those by buying items at their cheapest price and getting enough for many months. This also works great if there is weather or illness. You can avoid the shopping for some time.
I also enjoy having some cash on hand. For me it is money I can use if there is a earthquake or something that makes electronic purchases difficult or impossible.
The other thing that helps us to stick to our budget is that we both get some money each month that we can spend on anything we want. It helps avoid the fights over shoes and golf clubs, lol.
You are doing great! It feels great to pay off that consumer debt!
This is exactly what I’m hoping to see! While I dislike credit cards, I’m not 100% opposed to using them as long as they are used wisely. I recently paid our insurance bill this way, but I first pre-paid it on my credit card. That way there were zero worries that the cc wouldn’t get paid and it essentially saved me a couple of dollars on our insurance.
Thanks for your encouragement! I’m excited to see this through!