Sinking funds need to be a big part of your budget. My budget is a giant sinking fund, continue reading and find out why.

Sinking funds are a big part of any budget that has accounted for all the important expenses. My budget is a giant sinking fund. Many of the expenses are sinking funds.

Sinking Funds and your budget

Does your budget have any sinking funds? My budget is a giant sinking fund. Here is why, when I build my budget I budget for those expenses that I know I will pay during the year but do not pay every week.

My budget is built on an annual basis. Many other financial experts will tell you to build your budget monthly. While that works short term what happens to those expenses that get paid once per year.

Furthermore the case can be made that every expense is a sinking fund expense.

Sinking fund defined

A sinking fund is a fund where money has been put aside to pay for an expense. If you know you have an expense coming due then you put money aside to make the payment when it is due.

Consistently whipping out that credit card to make the payment will not work. This type of habit will keep you in debt.

To get out of that nasty habit sinking funds will be the answer.

My budget is a Giant sinking fund

As a rule I build my budget every year in December for the coming year. For the most part my budget is boring. The same expenses every month. I call them expenses because I know at some point during the year I will need to pay that bill.

Once I have built that annual budget every month I then take those expenses and use them for the monthly budget.

Our monthly budget includes the four walls, food, shelter, clothing and transportation.

Beyond that all the other expenses are mini sinking funds.

Why use sinking funds

Sinking funds will provide you with the security of knowing that you have an expense covered and a routine expense does not become an emergency because it is not. A known expense is never an emergency. This is something you should have planned for.

Using sinking funds assists you in planning your expenses. Planning your expenses will also help you reduce your budget where necessary.

My budget the Giant Sinking Fund

Included in my budget are many different periodic expenses, but I have two favorite sinking funds!

Our vacation fund and our Christmas fund. These are our favorites because we enjoy taking a nice vacation and for Christmas we gather together as a family.

Knowing we have the money set aside gives us peace of mind. We have set a budget ahead of time, then every month we put aside the required amounts and let it build until we need it.

How would it feel to go on vacation and not have to be concerned with finding money in the budget to go?

Everything is so much more enjoyable.

Out Christmas fund is for gifts and this makes Christmas a nonevent as far as gifts go. We have a budget and we have set money aside all year so it just happens.

Other sinking funds

Any expense that is not paid monthly must be allocated to a sinking fund. This will give you peace of mind when the bill comes due.

A funny story

Our life insurance and car insurance as well as vehicle registration are due in May. All year long we will put money aside to pay these expenses. Like clockwork the bills would come in and then we would pay the bills. While it was nice to have the money available to pay these bills with no real effort I always found it depressing.

The funds would build and we would have this nice balance in our account. The bill would come in and the payments would go out. Then the account balance would decline. I no longer felt comfortable with the reduced balance and actually felt poor.

The reality is that we planned and had the money for the bill so no reason to feel depressed.

I just had to sit myself down and come to the reality that having the money and planning ahead is much better than not having the money and trying to come up with it.

Sinking funds for other longer term savings

What about a new car. If you know you want to replace your current care how about setting aside some amount each pay check? For example suppose you want to get a new car in three years and want to spend $17,000. That would be about $5,700 per year. Breaking it down further, if you get paid 26 times a year which most of us do that would be about $220 per pay. Then when it is time for the new car you have the money.

Certainly beats a car payment!

Imagine doing this for all your larger purchases.

Once you have the formula down it will work for anything. A house repair or renovation. The possibilities are endless.

Not only is this a proven formula but it will keep you out of debt.

We all know that debt is not your friend and actually steals your wealth.

My sinking funds

I have a sinking fund for all my expenses. Some are shot like two pays. My mortgage payment is due every month just like everyone else but I always allocate half to each pay check.

Oh by the way I budget all my expenses based on 24 annual pay checks. That give me what I call two free pay checks. Sometimes I allocate them for something special other time I just save them.

This is why I call my budget on giant sinking fund. All my expenses are allocated by pay check.

Yes even my MLB subscription which is $120 per year payable every March around spring training. Yes a mere $5 per pay!

Pick your favorite way

How you decide to use sinking funds in up to you. Don’t get too carried away. Don’t save for a new roof for 15 or 20 years but may be when you may need one 5 or 7 years from now may be a good idea to save up.

The choice here is yours use these funds to your advantage!

Out outstanding Money Matters Wealth Tips, the series can be found HERE.

Other articles of interest:

10 Easy Steps to Creating a Budget that will put you on the path to Financial Independence

How to get out of Debt: Three popular Plans

4 Payoff Credit Card Debt Strategies

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