What is a sinking fund?
A sinking fund is similar to an emergency fund, but is used for future purchases as opposed to emergencies. Some examples of this are: Christmas gifts, vacations, car purchase, new roof, appliance replacement, etc.
The idea is to have the funds available when the time comes around. Let me explain: Christmas comes 1x each year. It never changes. You know exactly what day it comes every year – December 25th. You can start saving money January of 2021 for your gifts at the end of the year. Also, if you know that you are going on vacation July 2021, you can start saving a little bit each month for 12 months to ensure you can pay cash for your vacation. Get the picture?
We have sinking funds for several things: travel/vacation, life insurance, auto insurance, and gifts. With travel, it depends on when and where we are going in order to determine how much is needed. Flights, hotels, gas, car rental (if needed) are all factors when you decide to go somewhere. We always want to pay cash in order to be able to “afford” the vacation and not “pay for it later.” Life insurance is a 1x per year transaction. We are at the beginning of our term, so we still have a ways to go. We set a little aside every paycheck to ensure that when the bill comes, we have the funds to pay all of it in one lump sum. Same goes for auto insurance for us. We never pay any finance fees to the insurance company for not paying it off all at once. Lastly, we have an SF for gifts. We have birthdays, Mother’s Day, Father’s Day, baby showers, etc. Each paycheck there is a portion that goes into the bucket so we can pull from it at any point when we want to offer a gift.
It is an unusual phenomena – paying cash for everything. We are weird. But, we also do not have money fights. We have financial peace. Owing nobody is such a terrific feeling and we want to create behaviors that will allow us the freedom to do what we want with the funds that we have saved. Looking into the future is hard for some people to do, but if you start small, you can work up to larger transactions. Delayed gratification has been a very big component in our lives. We can say “NO” temporarily in order to say “YES” to a lot of other things in the future.
What about you? Have you started implementing SF’s? Was this the 1st time you ever heard of such a thing? If you do have SF, what buckets have you created?
Madsen Financial Coaching 