This used to be my favorite time of year because I was preparing to get a large tax refund. Now that my kids are grown, it’s not so fun because those big refunds are gone. This year I there’s a $3 difference between the small amount I owe to the Feds and the small amount Kentucky is giving back to me. I know, I know, this is what all the money experts say I should have been aiming for all along. Don’t want to give the government a tax free loan, right??
Here’s the thing, I liked knowing a big refund was coming in because I earmarked that money for some annual expenses I owed at the beginning of the year like my life insurance premium, car tags and vacations.
So what do I do now that I still have those expenses and my now grown man-children are no longer financial benefits to me? (I still love you boys!) Sinking funds are my favorite tool now to save for these random expenses.
Is A Sinking Fund The Same As An Emergency Fund?
Okay Holly, you’re always harping on us about having an emergency fund. Isn’t that the same thing?
Nope. A sinking fund is a separate account that is earmarked for a specific bill coming up. This is for expenses that you know will occur during the year. Think Christmas or deductibles/out of pocket health expenses.
Emergency funds are for truly unexpected expenses. A broken foot, a windstorm topples a tree onto your car, or you drop your laptop and it shatters.
What Type of Sinking Funds Should You Set Up?
This will vary from person to person. Here are a few that I currently use or have used in the past and a few that are common to other households.
Christmas comes the same time every year but I know I’m not the only one scrambling to come up with money for gifts and wrapping paper and decorations and parties every year. If you spend $1200 a year on Christmas that start depositing $100 a month into your Christmas Sinking Fund.
Health Deductibles/Out-of-Pocket costs
I currently have an out-of-pocket expense of $1,300 a calendar year. If I’m smart I’ll budget $110 a month into my medical sinking fund. My poor son has an out of pocket expense of $3,000 and he’s diabetic so we know he will meet that. He should be putting $250 a month into a sinking fund so that he will have funds available when his huge medical bills come in.
This is something new for me. I went for years without a real vacation. This is something I am determined to change now. I haven’t quite decided how much to put in here. I need to get to planning my next vacation so I can get this one budgeted. Nothing better than going on vacation and knowing it’s paid for.
I have a 12 year old car. And it’s one of those cars that is built crazy and every single repair is crazy expensive. One reason I’m in more credit card debt than I like is this crazy car. I’m starting a car fund that will either cover repairs or a down payment when I finally decided I’ve had enough of it.
For me this is my life insurance premium due in April of every year. Car registration used to be included in this but now my car is so old the bill isn’t that crazy so I can come up with it easily enough. It could be property taxes if you’re a homeowner and don’t have it escrowed. Any random bill could fall into this category.
Pets are expensive. That’s all, lol.
Maybe your couch is 11 years old and will need replaced soon (yeah, I’m talking to myself). When is the last time you bought a new mattress? Laptop older than your youngest child? Yep, probably needs replaced sooner rather than later.
So Where Do I Keep These Sinking Funds?
I personally keep my sinking funds in my Capital One account. It’s an online bank that lets me set up separate accounts and no minimum balances required. You could also set up a savings account with your current bank. I like the online bank because I can still transfer funds over to my checking account within a few days but it’s not so easy to borrow from it unnecessarily.
The important thing is to not tie it up in some type of investment vehicle that you won’t be able to easily access the money when your bill comes due. No, you’re not going to make a fortune in a simple savings account but that’s not the purpose of these accounts. Sinking funds are designed to help you save for these future expenses so you don’t have to dip into your emergency fund or worse, put it on a credit card.
What About My Emergency Fund?
You still need an emergency fund. Sinking funds are for specific events you know are going to happen.
You don’t know if a family member that lives across the country is going to get sick and you’ll have to grab a last minute plane ticket.
You’re not going to know in advance that your knuckle-head son is going to need an ER visit because he knew how to go really fast at the ice skating rink but didn’t know how to stop, and now he needs stitches.
You didn’t realize your Iphone was sitting on top of your car when you pulled out of your driveway in a hurry and ran it over. Now you need a replacement and you hadn’t even finished paying this one off yet…
Get the drift?
So How The Heck Do I Come Up With the $$$ For All These Funds?
So it’s probably not going to be feasible to start 5 or 6 sinking funds all at once. I would suggest picking the one that’s the biggest challenge for you. Maybe that’s Christmas if you always find yourself going way into debt every year. Or you could pick the item that’s coming up the most quickly. Maybe you know your vacation is in 4 months and you don’t have anything saved yet.
You can refer to my earlier post on building your emergency fund to get some ideas on coming up with some extra funds out of your budget to jumpstart these accounts.
The most important thing is to get started, even if it’s slower progress then you like. Afterall, if you need $1,000 to pay for Christmas, then even if you only end up with $600 by December, you’re still way ahead of the game.
What’s your biggest thing you struggle to come up with funds for each year?