HOW TO BUILD A WINNING BUDGET YOU’LL LOVE FOR BEGINNERS – PART 7: SINKING FUNDS

Thinking Ahead With Sinking Funds

Almost done!

Before we tie this budget up for good though, we need to make sure you’re planning for the knowable and inevitable things that will come up. The things that have the potential to wreck your work.

For that, we turn to saving and sinking funds.

This is a critical part of your budget! If you execute your sinking fund savings correctly, the rest of your budget can withstand the predictable things life will throw at it with no issues.

What Are Sinking Funds?

If you’ve explored many resources on budgeting, this may be a term you’re familiar with. However, it’s my experience that many budget planning resources fail to give sinking funds the weight they deserve.

Let’s think about it like this: You KNOW that Christmas happens every December 25th. And, if you celebrate and give gifts, you KNOW that you’ll need money to cover those expenses. But, if you set up your monthly budget correctly (so that every cent you bring in has an assignment), then you probably won’t have a few hundred extra dollars laying around for the expense of the holidays.

THIS is where your sinking funds come in!

Don’t come to the holidays and finding yourself in a situation where you have to choose between paying the mortgage and buying presents. Use a sinking fund to prepare for this inevitable event.

For instance, my wife and I set aside $100 each month in a sinking fund we call “Holiday / Gift Fund.” Over the course of the year, this builds up until the holidays roll around and we are ready for some celebrating!

And that’s it! Simple!

A sinking fund is just a stash of money you build up each month until you reach the event it’s earmarked for.

Where Do You Keep Sinking Funds?

The question of how to track your sinking funds and where to keep that money is really up to you. Considering that this falls under the category of “saving” rather than “investing,” I think keeping the money fairly liquid is a good idea.

For instance, my wife and I keep our funds in simple savings accounts. We track them in our budget tracker, which is set up to show what the value of the fund should be as we add to it each month.

Emergency Fund vs. Sinking Funds

The first “fund” you should set up, prior to any investing or sinking funds, is a BIG emergency fund. And I’ll say this, in my opinion, access to credit does not count as an emergency fund.

I say that because some may be tempted to skip this step when structuring their finances. Maybe because you feel comfortable opening up a home equity line of credit or have a credit card with no balance. But, in a true financial emergency, nothing will get you back on your feet faster than cash. Just reflect back to the post on debt and it’s friend interest.

No. Instead, have an emergency fund that’s big enough to get you through a real tough time. For my family, that’s six months of expenses. For some people that may only be three months. Some sources I hold in high regard suggest even going up to twelve months, though to me that seems excessive.

Regardless of the amount, set your emergency up first!

Now, let’s consider a couple of scenarios.

You realize your car is getting older and that you will need to replace it within the next year or two. This is NOT an emergency. You have two years to start a sinking fund to prepare for this inevitable event.

On the other hand, if your a/c unit goes out and you can’t find the money in your budget to replace it, this may in fact be an emergency. But, rebuild the portion of your emergency fund you took out as quickly as possible!

Do This Now

First, decide on the amount you want in your emergency fund and make a plan to build it to that amount.

List out some of the budget busting items that seem to catch you off guard each year. Think about what each of these events usually cost, and decide how much you need to set aside each month to prepare for them. Write this all out.

Next, think about some more long-term events that you see coming up in the less immediate future. Maybe you’d like to take a bigger trip in two years, or have a wedding to pay for in 18 months. Figure out how much you should start stashing away and write this out.

Put these plans into action once you have your emergency fund saved.

The Full Budget At A Glance

Section 1: Gross Income

Section 2: Paycheck Deductions

Section 3: Giving

Section 4: Debts

Section 5: Investments

Section 6: Basic Needs

Section 7: Fun

Section 8: Sinking Funds

The following two tabs change content below.

• Bio
• Latest Posts

Alex

Hello, my name is Alex! I'm a public school teacher who has achieved some big financial goals just by getting control of my money using some simple strategies like using a monthly budget. Now I'd like to share what I've learned with you. Welcome to "Bank on a Budget!"

Latest posts by Alex (see all)

• Financial Coaching Services - January 18, 2022
• TOP 10 PERSONAL FINANCE MYTHS THAT ARE HOLDING YOU BACK - February 26, 2021
• HOME BUYING EXPENSES CHECKLIST – 14 COSTS TO BE READY FOR - February 26, 2021