Things seem to be going according to your budget when along comes the bill for your homeowner’s insurance or the kids checkups or new tires and in one transaction your carefully conceived budget is blown. These expected but irregular expenses can be difficult to handle unless you do a little advance planning.
A well-managed sinking fund is an often forgotten but crucial component of your financial plan.
In our household, nearly 40% of our expenses are non-monthly. Insurance and taxes are reasonably predictable but we pay them quarterly or annually. Car repair and medical bills are unpredictable in both the amount and frequency. We also use our sinking fund for luxury items like vacations, gifts and home improvements where we have the flexibility to set the amount and the due date ourselves.
Here’s how we manage our sinking fund:
We have a spreadsheet listing each non-monthly expense its due date and a predicted amount due. Divide the amount due by the number of months until the due date to find out how much your monthly contribution needs to be.
Each month when we lay out our budget, the necessary monthly amount for each of our sinking funds goes in the second column of our budget form while expenses that we pay this month go in the first column.
For example, in the category, Housing, property taxes, repairs and insurance are all sinking fund accounts while pool supplies and propane are regular monthly expenses. The green background notates that Property Taxes and Insurance have required fixed amounts while we do have some flexibility on what we contribute to Repairs & Upkeep.
We complete the budget for the month making sure we allocate all income. Income can pay expenses, pay debt, go toward retirement saving, emergency fund saving, sinking fund saving or investment, but we must plan in advance what to do with all of it.
When we are done with the budget, it looks like this:
| Income | Current Month | Sinking Funds |
|---|---|---|
| Net Monthly Income | $3,498.00 | |
| Expense | ||
| Giving | $200.00 | |
| EMERGENCY SAVINGS | done | |
| DEBT REDUCTION | done | |
| Housing | $- | |
| Saving Property Taxes | $267.00 | |
| Saving Homeowners Insurance | $292.00 | |
| Repairs/Upkeep | $75.00 | |
| Pool& Propane | $75.00 | |
| Utilities | ||
| Electricity | $250.00 | |
| Internet | Business | |
| Cell Phone | $68.00 | |
| Trash (Dec, March, June, Sept) | $32.00 | |
| Water/Sewer (Dec, March, June, Sept) | $80.00 | |
| Food | ||
| Groceries/Household | $700.00 | |
| Eating Out | $150.00 | |
| Transportation | ||
| Gas | $220.00 | |
| Repairs, Oil, Tires | $45.00 | |
| Car Tags/Registration | $12.50 | |
| Car Insurance | $143.00 | |
| Bike Parts | ||
| Personal Care | ||
| Clothing | ||
| Hair Care | ||
| Medical | ||
| Dental/Vision/Medical | $100.00 | |
| Pet Care – Food/Meds/Vet | $15.00 | |
| Insurance | ||
| Life Insurance | $34.00 | |
| Disability Insurance | $166.67 | |
| Health Insurance | $173.00 | |
| Boat Insurance | $23.00 | |
| Entertainment | ||
| Netflix, MLB, Hulu | $31.58 | |
| Blow Money | $100.00 | |
| Other Entertainment | $145.25 | |
| Vacation | $50.00 | |
| Gifts | $50.00 | |
| TOTAL Expense | $2,224.83 | $1,273.17 |
The monthly total for sinking funds is transferred to our high interest checking account.
| Sinking Fund | Months till due | Date Due | Amount Due | Monthly | Balance | Spent | New Balance |
|---|---|---|---|---|---|---|---|
| Budget for 6/1/2011 | |||||||
| Property Taxes | 6 | 11/29/2011 | 3,700.00 | 267.00 | 2,115.80 | – | 2,382.80 |
| Homeowners Insurance | 9 | 3/4/2012 | 3,795.00 | 292.00 | 1,137.80 | – | 1,429.80 |
| Home Repairs/Upkeep | as needed | 75.00 | 5,556.76 | – | 5,631.76 | ||
| Repairs, Oil, Tires, Car replacement | as needed | 45.00 | 5,892.76 | – | 5,937.76 | ||
| Car Tags/Registration | 9 | 3/1/2012 | 150.00 | 12.50 | 37.50 | – | 50.00 |
| Car Insurance | 3 | 9/1/2011 | 860.00 | 143.33 | 430.01 | – | 573.34 |
| Dental/Vision/Medical | as needed | 100.00 | 3,676.97 | – | 3,776.97 | ||
| Pet Care – Grooming/Meds/Vet | as needed | 15.00 | 116.46 | – | 131.46 | ||
| Life Insurance | 1 | 7/1/2011 | 827.00 | 34.00 | 793.00 | – | 827.00 |
| Disability Insurance | 2 | 8/11/2011 | 552.00 | 166.67 | 163.10 | – | 329.77 |
| Boat Insurance | 6 | 12/1/2011 | 529.00 | 23.00 | 391.00 | – | 414.00 |
| Vacation | as desired | 50.00 | 50.00 | 50.00 | |||
| Gifts | as needed | 50.00 | 968.00 | – | 1,018.00 | ||
| TOTAL Sinking Funds | 1,273.50 | 21,329.16 | 22,502.66 |
Any planned or necessary sinking fund expense is then paid out of that account and deducted from the correct category to give us our new balance for the next month.
Everyone needs a sinking fund. Even if you are still paying off debt, you must account for irregular expenses. The car needing tires is not an emergency. With experience, you can learn to predict what car and household repairs to expect and about how much they will cost.
If you are just starting out, there may be times when there is not enough money in your sinking fund to cover a necessary expense. Now what? If the starter is out on the car and you need the car to get to work this may be an emergency. Dip into the emergency fund to take care of the problem and then make rebuilding that emergency fund your top priority.
Borrowing between sinking funds is allowable in my house as long as:
1) The account to be borrowed from is not one setup to pay a required expense with a definite due date.
2) We both agree.
A well managed sinking fund protects your emergency fund and makes large expenses much more manageable.
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