Even with a budget, some expenses can wreck it without planning ahead for those. Sinking funds are the way to incorporate these budget categories. These are different than emergency funds which we save for those unpredictable expenses that surface.
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It’s not that Christmas was unexpected this year, but I wasn’t prepared for that big expense. I knew I should have been planning for it, but honestly, it took all my energy just to get through the week with everything else that demanded my attention sometime.
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There was no time to sit down, write who I needed to buy for, how much to spend on each person, and figure out how much to start saving each month. I wasn’t even sure how much in total I was spending for Christmas to take a short cut and just start saving a little each month. I didn’t know really where my money was going. We were just in survival mode.
This was what many years looked like for me. I was tired of the same thing each year, so I knew if something was going to change, I needed to do something different. So, I decided to try to plan and save for Christmas. I did have to make some adjustments to our budget to put Christmas money aside each month, but the results were well worth it. It was less stressful when Christmas shopping time was here, and I had the money already set aside to go.
I knew I had to do this for other areas in my finance world as well.
A sinking fund is a fancy finance word for setting aside monies for expenses set for a particular purpose. This is a saving account where you are planning ahead to save before the actual expense.
There are many budget categories of expenses that this is extremely helpful. Without this, it can wreck your monthly budget to have to come up with this money all at once. Below are some simple ideas to consider.
Budget Categories Forgotten
Christmas comes every year so start saving in January for it. Even if it’s June and you haven’t started saving yet, it is still not too late. The first year is the most difficult as you must put a list together with amounts per person to spend. The next years just involve adjusting as needed to the list and continuing the momentum.
2. Property tax (if not in your mortgage payment)
This is another expense that should not be a surprise. It will generally be the same amount each year unless there is an appraisal in which there will be an adjustment. In my town, it’s due the same month as another huge expense of Christmas
The best vacation is one where you can relax, enjoy some time off, and have it already paid for. It’s already difficult going back to work after a vacation to see what’s piled up on your desk and mounds of clothes to wash at home, but to have to pay for the vacation afterward too is stressful. This is an example of one of the budget categories often missed in our budget.
You may not know where you plan to vacation for the year, so you won’t be able to calculate the proposed expenses. Start somewhere by putting money aside. The dollar amount can be adjusted when you know more.
4. Replacement vehicle
While each person may keep a car a different amount of time, it is true for all that after a while, we’re going to all need to buy another vehicle. Put money aside monthly so you have a good down payment. This is especially a good idea if you already paid off the current vehicle you have. You made do with making that car payment, so just pay yourself that same amount in a special bank account to go towards the next car purchase.
Even with insurance, there is generally a large out of pocket to pay for braces or other major dental work. Start savings for this when the dentist mentions that braces might be needed. You’ll be glad you did when it comes time to pay.
I’m not sure where the time goes between when kids are in diapers to when they’re off to college. College costs increase almost every year it seems.
Start saving monthly for this. Every little bit helps. If you’re lucky and they get a scholarship or perhaps they don’t go to college, you can redirect where this budget category goes, since this is just money earmarked for a particular purpose in your savings account.
7. Replacement furniture
Wear and tear happen and what used to be beautiful furniture will need to be replaced at some point. Perhaps replacing furniture is in your 5-year financial plan. You may not know the exact amount but estimate something to go towards this.
8. Replacement appliances
When the washer, dryer, stove, oven, or refrigerator goes out at any time, there is not the luxury of having months to plan to buy another. This disrupts the household flow of keeping clothes clean and food on the table. The appliances might be new, but unexpected lightning can take one of them out. (Unfortunately, this happened to us…. refrigerator, TVs, etc.)
You may or may not need this fund, but it’s better to plan as you do just in case. Once an engagement is announced, it is strongly encouraged to start a fund for this. From engagement events, showers, rehearsal supper to the actual big day. You can learn more about weddings with this article How to Save Money with these Ten Wedding Ideas and Tips.
10. Graduation – gifts, party, invitations, cap & gown
Whether you or your family are graduating, there will be at minimum family friends who are graduating and you’ll need to send a gift to them. This might be from Kindergarten, 8th grade, 12th grade, college, or some other time. If it is you or your family, there are various items like invitations and any celebration that you’ll need to figure out how many people will be invited to order and start saving for.
Decide what expenses you need ahead of time and put this as one of the budget categories. You’ll be glad you did later.
11. School items – supplies, uniforms, & fees
School supplies, shoes, uniforms or new clothes, and fees can get expensive, especially for multiple people. Set aside money to make this a less stressful time.
Some years you may need more money set aside depending on if it is a new school with different uniform requirements or if your kiddos have had a big growth spurt during the year and need all new clothes. One other item to consider is that while you may spend more money to buy more pants, shirts, etc., it may save you time in the long run by not having to wash clothes as often.
12. Jr Year- Graduation Rings
Graduation rings are not cheap! My daughter decided not to get a graduation ring, but instead, we bought a nice ring for her to wear every day.
13. Prom & Homecoming – dress/tux, flowers, dinner, etc.
Depending on the school, there may be multiple dances that need a dress/tux and the frills that go with it. This is a great way to teach your kids how to work with a budget. We would let our daughter know what the budget for something was for each event. She was able to choose what she wanted to spend the money on. That included making trade-offs like wearing shoes she had already so that money could be spent on getting her nails done, etc. I will let you know that this did not give us “parents of the year” status by giving them a budget. At the time they did not like it, but now as they have gotten older, it has benefited them as it taught them skills on how to manage money.
14. Mother’s Day & Father’s Day
This should be calculated like Christmas by figuring how who to buy for and how much you’re going to spend. When it comes time to buy something, you’ll have the money already set aside and it won’t put a big dent in your monthly budget for those months.
15. Birthday – gift, party, dinner, & other traditions
Each family has their own traditions, so plan accordingly with the money side to cover this. If the birthday is for a niece or nephew, you may just need to budget for a gift. If the birthday is for your immediate family, consider other expenses like a cake to celebrate, a special meal you cook, or perhaps dinner at a restaurant.
16. Pet annual check-up & medicine
Sinking funds can be used for these routine pet costs.
17. Insurance (if not paid monthly)
Determine how often this is due and save accordingly monthly. Some insurances are due every six months. By having the money set aside monthly, this will not wreck the budget when the month that it is due comes around.
18. Many other budget categories
Perhaps there are other budget categories associated with activities like sports, karate, piano, etc.
For some budget categories, I use plain white envelopes where I can write what they’re for and the amount in it. Then I seal them up, so I’m not tempted to use the money for something else. Each time I add money to it, I just get a new envelope and write again what it is for, dollar amount, and then seal it. You may have heard about the Dave Ramsey envelope system. This is the cash envelope system I use.
For other sinking funds, I put it in the bank. You can have a separate bank account for different items or keep a spreadsheet of what makes up the different amounts in each category all in the same bank account.
Do what works best for you.
Steps to Include These Budget Categories
1. Identify “what” expenses you will need. Yes, there is a lot mentioned here. You may not be able to do all of them at the beginning but start somewhere.
2. Assign a dollar to each category.
3. Incorporate them in a budget.
4. Decide where you will “save” this money until needed – bank account, cash envelopes, etc.
It will be hard to assign a number for Christmas without going through the process of knowing who you will be buying gifts for. The next step is deciding how much you will spend on each gift and then total them up. To get your monthly amount, just divide by the number of months between when you start saving to when you need it. Read this article Look – No Credit Card for Christmas for more information regarding this. Do this same process for figuring how much is needed for gifts – birthdays, anniversaries, graduation, Mother’s Day, Father’s Day, Valentines, etc.
Benefits of Sinking Funds for these Categories
Sinking funds are a great way to plan for certain known expenses. This is in addition to having an emergency fund that is used for unpredictable expenses that will surface.
In addition to making the finances smoother, sinking funds will make these times of added expenses less stressful.
Write the details of the sinking funds down to see how it was figured out. I use an excel spreadsheet, but you can also use a notebook. Once you have the monthly numbers for each budget category you want to use, this will be a line item just like a utility bill in your monthly budget. The most difficult part is getting started, especially if you just had to come up with all the money to pay for one of these types of expenses we mentioned above. Start with one or two and then add another one as you get more comfortable with the process. Some of the sinking funds require larger amounts of money to save than others. Even if you choose just one of these, you may not be able to completely fund this the first year, but having part of it will still be a big help.
Sinking funds are those expenses that you anticipate but will occur at specific times of the year. By incorporating these budget categories into the budget, each month will be smoother and hopefully less stressful. Plan for those anticipated expenses and figure them into the monthly amount to set aside specifically for that. Start with one and see what you think.