It has happened to all of us. You project a nice, detailed budget for the rest of the year, and unexpected expenses get you off rails. For that reason and many others, using sinking funds is a great idea for a prudent budget.
Even if you don’t plan on using a clearly defined budget, this is a great tool for an organization. You might earn a similar amount month to month, but expenses are usually not regular. Sometimes several big expenses are due in the same month, making it difficult to anticipate your spending accordingly.
That’s where sinking funds will help you and make your life a little bit easier.
As we will learn in the following article, sinking funds are a versatile tool that adapts to your preferences. Take this article as a guide to get ideas on using them, but change them as you will. The most important part is actually to use them, but implementation should be in the way that serves you best.
What Is a Sinking Fund?
Sinking funds are ways to save money for specific expense categories. For example, you can create a sinking fund for your Christmas gifts to start saving in advance. When Christmas comes, you use that money to cover part of the gifts.
Although simple in theory, there are many ways you can create sinking funds. Categories will change according to your lifestyle, and the actual funds can be cash or in a separate bank account.
In practice, sinking funds can take many forms. If you can have a separate checking or savings account, you can use that. You can also save them in cash, inside a drawer, in envelopes, or in some hidden place, whichever serves you best. If you prefer, you can use cryptocurrencies too. Of course, you should consider the liquidity of these funds so you know you can use them when needed.
What Are the Advantages of Sinking Funds?
The simplicity of sinking fund implementation has made them very popular, bringing several advantages.
It is easier to meet bills when you can anticipate them. Having a few months to get prepared is very helpful. Sinking funds help you know where you are standing month to month, not spending too much.
Sinking funds can also be lifesavers in critical situations such as accidents, disease, car repairs, and more. Even if your car repair sinking fund is not enough for a new set of tires, it will probably help by covering part of that expense.
Lastly, sinking funds can help you save money by seizing discount opportunities or paying for things in longer intervals. Usually, if you have the option to choose quarterly instead of monthly payments, you will be given a discount.
Sinking Fund Categories and Ideas
As we saw earlier, you can convert all sorts of large expenses into sinking funds. Still, it is good to get some ideas because there are expenses that we may forget to consider.
If you already have a budget or have tracked your expenses for some time, you can get some ideas there. The largest expenses in previous months or years make for possible sinking funds categories. Start there, and see if they are likely to appear again in the future, and how you value their importance.
You must consider several factors to know which funds are more important to you. If you have brand new furniture or a recent car, you’ll be less prone to spend on them shortly. The dental health of one of your children is something you wouldn’t want to keep on hold, so you should prioritize it.
In that balance of importance, possible size of the expense, and other considerations, you will find your budgeting needs.
Let’s throw some possible categories and see some considerations that apply to each. That way, you can keep them in mind while planning your future. This should also give you some ideas for categories you need but may not be listed here.
Medical expenses can come out of the blue and present big expenses that are hard to include in a budget. This makes for great sinking funds categories.
If you have healthcare, you should know the ins and outs of their service so you know what it covers. That should give you an idea of what kind of expenses you can face in the future.
Keep in mind, the average cost of staying 3 days at a hospital is nearly $30,000. Paying a bill that high can take years. For that reason, having good health insurance is important and having a medical expense sinking fund. That makes it one of the top priorities for many people.
If you or your family happen to wear glasses, you know how expensive they can be. They can break or require new lenses over time. If you don’t have vision insurance, a complete pair of glasses can run over $350. Given enough consideration, these can be included in your health sinking fund.
Vehicles and Transportation
Car breakdowns happen, as well as crashes. Hopefully, you’ll stay far from those, but it’s best to be prepared. This is an excellent example of a sinking preventive fund.
However, consider that this fund can also be considered savings for a new car. If you plan on buying a new car, having cash in hand is a valuable negotiation tool.
Many insurance companies offer yearly payments as an option. These will come with a discount, so they should be considered.
Whether it’s a car, home, or life insurance, you should ask about the company’s payment plans. This can be a great way to save some money on a very important item from your budget.
When that time of the year comes, you want to show your love to family and friends through gifts. But gifts can be expensive and the holidays come at us so quickly it’s hard to prepare. Setting aside some cash for a few months will be very useful once you go shopping for gifts. That is a good opportunity to implement the sinking funds’ method.
Christmas is the first example that comes to mind. However, this fund can also make your life easier for other holidays and birthdays.
The home repairs category probably speaks for itself. You probably experienced the stress of a costly unexpected repair. Wear and tear get to everything, and parts of our house like plumbing or electric equipment are not the exception.
Structural damage is possibly one of the most expensive repairs, easily reaching over $10,000. Solving issues with your roof or changing pipes can be costly as well, and water damage is possible in both cases.
In some of these situations, each day they remain unsolved makes total repairs more expensive. For that reason, having a fund to help pay for these things probably makes sense in the long run.
Depending on what your trade is, tools can be expensive and inevitable. It could be a laptop if you are a graphic designer or an electric drill if you are a roofer. In either case, these tools become old or stop working eventually, and you’ll need to replace them.
Additionally, maybe you could figure out a plan to change them for better tools each year by using this fund.
Sinking funds are great for this item that can be quite pricey. Investing in these tools wisely is important as they can save or even make money for you in the long run.
Going on vacations can represent a large part of our yearly budget. Considering that, a vacation sinking fund makes a lot of sense.
Many people do this the other way around by falling into debt to go on vacation. That is not advisable and can have tragic consequences. When you have the chance to pay in full for some vacation expenses, other opportunities will often appear. You can even get discounts in hotels or other fees.
Winter has come around, and both of your kids need new jackets? That could be hard to put in a month’s budget. Clothing can be expensive, especially for families, so having a sinking fund for this purpose is not a bad idea.
Winter clothing can be expensive and is a must-have depending on where you live. Footwear is also a costly item, and buying quality is often better in the end. Planning can save you money when it comes to having a functional wardrobe. A sinking fund can come in handy if you spot a good opportunity on something you know you need.
You’ll likely need to buy or repair furniture if you are moving soon.
Replacing it before it gets too old is also a good idea and can be quite expensive.
Having a sinking furniture fund can also save you in case it gets damaged. This is a risk to consider, especially if you have pets or children.
When the time comes, you will be thankful for having some money. That can help you in choosing your new sofa or bed more freely.
Credit Card Fees
Many credit cards charge annual membership fees. Those can be quite costly and should be considered in a sensible budget. Some are over $90 and can reach up to $500.
It is a good idea to know the fees associated with your cards and when you have to pay them. This could save you lots of hassle and avoid falling into unnecessary debt.
Consider other fees that could apply, like foreign fees or balance transfer fees. All of these expenses make savings funds reasonable for credit card fees.
Some bills can grow a lot during specific seasons. That could make your budget tight for several months, so preparing for that is not a bad idea. Heating and air conditioner use may cause hefty bills, which often surprise us.
Sound financial planning should contemplate those seasonal expenses and define actions to assure you can cover them. So, depending on where you live, this is something to consider for a sinking fund.
Setting up a back-to-school fund is a great idea to make that part of the year less stressful.
This can help you prepare to cover the costs for school supplies, clothes, lunch boxes, backpacks, and other school-related expenses. Of course, the size of this fund will depend on how many kids you have and how old they are.
Depending on requirements, it’s probably best to define this one each year. A helpful tip is to keep a note in your fridge or somewhere you see it often. Each time you remember something you will need to buy, you can write it down. That will help you estimate the size of this sinking fund.
Do you pay tuition every year? When the time comes, you should already be prepared, so it’s good to be proactive about it.
Knowing how tuition is billed and the types of plans available will go a long way towards a good budget.
Usually, tuition applies to a full academic year ranging from September to May. Payments are often due on predefined dates, so make sure to start with this sinking fund as early as possible.
Sinking funds to catch good offers
Sometimes, you will be presented with opportunities to pay cash or pay several months in advance helps save money. This could happen with various services, so keep in mind asking vendors for yearly payment plans.
Having saving funds for those cases is an excellent idea, provided you don’t spend it on unnecessary things. This type of general saving fund will often help you catch categories you didn’t think about previously.
What Should Your Planning for Sinking Funds Look Like?
If you already use a budget, sinking funds should be easy to implement.
If possible, make sure to have a calendar nearby and write down due dates and amounts for future charges first. Then, make a list of preventive sinking funds by order of importance. Ideally, defining the total amount you want each one to hold would be a good idea.
That will give you a clearer view of how to fit in the rest of your obligations. You will probably want to complete the most important sinking funds first, so find their place in the calendar in that order.
Use the method that serves you best, but as an example, in practice, your plan could look as simple as this:
- Medical expenses: $4000
- Home repair: $2000
- Christmas gifts: $500
- Tuition: $3000
It may not look like much, but you can put a little list like this in a box where you throw money each month. That will work wonders in the following months to help you achieve these goals.
Sinking funds are great, not only for your budget but also for your credit score sometimes. They can also be amazing for your peace of mind. Knowing you have a safety net for future expenses removes a lot of stress from your life.
Individual categories and implementation specifics are not that important, but you should use this concept to plan when possible. Individuals and businesses can use sinking funds, and they are professional tools.
How you use sinking funds greatly depends on your needs and preferences. Think about consistency and simplicity overall; that will smooth things out as this is a marathon, not a race.
Hopefully, after reading this article, you will have several ideas for organizing your budget better. The sinking fund categories in your list may be less than those offered here. However, just having a few important to you will make a huge difference.
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