A sinking fund is a necessary piece to a personal financial plan. There is no right or wrong category for this secret weapon. It’s your financial future. Choose the funds according to your values.
I only wish that its name didn’t sound so gloomy.
What Is A Sinking Fund
A sinking fund is the systematic financial contribution of money to purchase something new, repair or replace an asset, or pay off a long-term debt. A sinking fund requires vision, discipline, and execution. Families should prioritize which sinking funds are established based on their financial dreams and goals.
There are dozens of different types of sinking funds. The sky is the limit. Most of us, however, are unable to fund them all because our incomes are limited. We can and should prioritize which sinking funds align with our family’s financial values.
Those are the ones that should be made a priority.
Why Start A Sinking Fund
These provide the opportunity for us to see the invisible and do the impossible. Instead of being surprised by a financial situation, we can imagine it before it happens. Then it can be pre-funded before it creates financial chaos.
Here’s a simple example.
Christmas happens each year on December 25th. Yet, annually people max out credit cards to buy gifts. It’s as if they were totally caught off guard that Christmas was at the end of December!
A Christmas fund can simply be established. Let’s imagine that you’re budgeting $1,000 for that special holiday. You’re paid every two weeks. You will need to set aside $40 per check for the next twenty-five checks.
This same idea is replicated for many other events.
Where Should I Put A Sinking Fund
You will want easy access to the funds just in case they are needed. An online savings account is a great option. The funds are easily accessible and you will at least make some money in interest.
Investing these funds in the stock market is risky.
All of my sinking funds are in one account. Each fund is then tracked in a spreadsheet.
I suppose that you could have multiple bank accounts.
That, in my opinion, is complex and I prefer simple financial solutions.
Investments Are Different
I love my health savings account (HSA). That, in my opinion, is not a sinking fund but more of an investment. A big chunk of my HSA is invested in mutual funds.
Retirement accounts are the same. Additional funds trickle in with the goal of retiring someday.
College funds are kind of on the line for both. Most college funds are invested outside of a simple savings account.
Sinking Fund vs. Emergency Fund
Usually, this is the first type of sinking fund established by most families. An emergency fund is a catch-all type of sinking fund. An emergency fund should adequately cover emergencies such as a furnace surprise or an unexpected automobile repair.
Financial planners typically recommend three to six months of family expenses for an emergency fund. This gives the indication that an emergency fund is used to cover living expenses. In some instances, a furnace replacement would exceed three months of living expenses
Establishing sinking funds for different events is vital to minimize financial stress.
Flexible Spending Account
Flexible spending accounts (FSA) can be established through some employers. Not everyone will have access to them. Participation is highly recommended if one is available.
These are primarily designed to cover health expenses. An FSA is established during open enrollment. Deductions are made directly by the employer. The funds are available for optical, dental, and medical expenses.
FSA’s are a use it or lose it type thing though. If the funds are not used by year-end then you lose them. It’s still a great deal. I’ve been “forced” to buy prescription sunglasses at the end of December to avoid losing my investment.
DIY Escrow Account
Disciplined homeowners should DIY their real estate taxes and insurance. I used to have my mortgage company handle my escrow funds. It was a hassle. Illinois real estate taxes are always increasing. That means my monthly mortgage rate was always changing.
With a DIY escrow, I at least earn a few dollars of interest on my escrow funds.
Just don’t forget to pay your taxes when they are due!
Christmas Club
See above.
Automobile Replacement
The average car payment amount now hovers around $631 per month. That’s more than the mortgage payment on my first house. Ouch!
An automobile replacement sinking fund could help minimize or eliminate a car payment. How much does the car cost that you want? What kind of time frame do you have before needing to buy again?
If you think that you will always have a car payment then you are right. If you think that it’s possible to eliminate or reduce car payments you are also correct.
House Repair
Homeownership is overrated. Houses typically appreciate in value. They also require constant upkeep and repair.
Some indicate that annual home repairs should be budgeted at around 1% of the estimated home value. Others state that home repair budgets should be $1.00 for each square foot of the house. Either way, homeowners need a house repair budget and a sinking fund.
There are cost-prohibitive areas as well. Roofs will eventually need to be replaced. Furnaces and A/C units eventually become unfit.
House Downpayment
House down payments can be painful. A 20% downpayment is awesome but also expensive. The median home price is currently around $269,000. That equates to a $53,8oo down payment!
There are loans available with a 3% down payment. That would be around $8,000.
How much do you need? What’s your time frame for purchasing?
Vacation Sinking Fund
Vacations can be expensive. They often cost more than anticipated as well. It’s important to plan well and understand all of the costs involved. Vacations paid with cash are enjoyable. Making payments after the fact taints great memories.
New Business Fund
Some business ventures require serious capital to get off the ground.
Inadequate new business funding often leads to failure. New businesses are cash-hungry! If you’re considering starting a new business then a sinking fund will be your best friend.
Wedding Fund
Weddings are typically five-figure events. Weddings can easily get off course because of the emotional component.
Set the budget in stone. Resist cutting your own throat so your “baby girl” can pretend that she’s a princess for a day. There should be no shame or embarrassment in setting a budget.
If the Prince and Princess want more then they can do it on their own dime.
Set the budget and then write the check.
Start the wedding fund well before the engagement.
Birthday & Graduation
We all know when birthdays and graduations occur. These should not catch us off guard at all.
Your child is graduating high school or college and you know it. Plan accordingly. Consider parties and gifts.
Be as generous as you want to be.
Fido Sinking Fund
We love our animals. There will be times when our family pets might require more than an annual rabies vaccine.
I have friends who have paid for ACL repairs for their dogs. Others have funded cancer removal operations. These things do not come cheaply.
You cannot know that these events will happen. However, it’s wise to set aside some money in case they do.
Insurance
My insurance carrier provides a 30% discount if I pay semi-annually. Sign me up, baby! I set aside the monthly premium and then pay every six months.
Many mortgage companies require a full year of house insurance. Us DIY’ers need to set aside enough to write one check annually.
Household Appliances
Appliances and furniture are destructible. Appliances often are less expensive to replace than to repair. The shelf life of laundry and kitchen appliances is about 5-7 years.
Sure you can always go with the “12 months same as cash” route or you can just buy it. The same as cash method is often a snare.
Peaceful Secret Weapon
Every dollar we bring home needs an assignment. Actively assigning each dollar will eventually create peace.
You are the master and commander of your financial plan. If you desire peace then you must be proactive. Assign each dollar a future responsibility.
Annual vacations are a family value for you. It’s imperative for you to make sure that your vacation sinking fund is adequate. Fast food, booze, and other things can easily knock you off course allowed.
Take some time to identify what’s truly important in your life. Begin funding those activities as you are able. Tradeoffs will be required. You must decide what’s most important. Then get busy.
I dare you to profit!