Personal Finance Tip of the Week – Sinking Funds

Set aside different pots (or mugs!) of money to reach specific goals

Sinking funds are specific “pots” of money you establish to save on a regular, monthly basis for an irregular expense. Irregular expenses are anything you pay on an other-than-monthly basis. Here are some common examples and possible frequencies of payment:

• Oil changes (quarterly)

• New car tires (every 3-5 years)

• Holiday gifts (annually)

• Amazon annual subscription 

• Zoo membership (annually)

• Taxes (quarterly or annually)

• Auto registration (annually)

It’s a fairly simple concept, but not always super easy to put into practice.  Step 1: figure out how much you owe, how long you have to save, then divide by the number of months to come up with your monthly savings plan.  Here’s an example using oil changes: Cost of one oil change: $75 Frequency of oil changes: Approximately every 3 months $75/3 months = $25 So every month you should set aside $25 in order to be able to cash flow your car’s next oil change. If you have two cars, this amount would double. That’s step 1 – figuring out how much to save each month.  Step 2 is a really critical part of the plan – without it your sinking funds won’t help much. Once you know how much you have to set aside each month to meet your obligations for all of your irregular expenses, take that amount of money and move it to a separate  account (I like to call this account “bills”) so it’s out of reach until you need it.  Here’s a simple illustration:

• Oil Changes = $25/month = $75 quarterly

• Amazon Annual Subscription = $10/month = $120 annually

• Zoo Membership = $30/month = $200 annually but say you only have 6-7 months to save

• Auto Registration = $25/month = $300 annually

TOTAL MONTHLY COST OF SINKING FUNDS = $90

That means you have an automatic transfer set up each month between your primary checking account and your bills account for $90. Then, when you go to the auto shop for that oil change, you’ve already transferred over the $75 you need into your primary checking account and you’re ready to pay cash. 

Keep track of your sinking fund balances via a spreadsheet or a budgeting tool like EveryDollar.