When sticking to a budget (If you need help writing a budget, you can find that here ) my biggest priority after paying for my fixed expenses, is to contribute to my Sinking Funds (SFs). This is because SFs stop me from acquiring more debt.
In this blog post, I’m going to talk all abut SFs, what they are and how I use them.
What are Sinking Funds?
Essentially, all of the things that you expect will happen at some point, are covered with small amounts of money that you put away into an account every month.
I like to think of Sinking Funds as lifeboats on a sinking ship. All is going well, you are sailing along quite happily on your debt free journey, your budget is running smoothly, you are paying off your debts using your Debt Snowball (or Avalanche), when BAM! All of a sudden, you hit an Iceberg. That Iceberg may be a broken down car, or School Uniform costs, or whatever the case may be.
What Sinking Funds do is take away that panic of hitting the iceberg. So you aren’t left panicking about how you are going to cover that expense. In reality we know these things WILL happen at some point. Its unheard of for you to buy a car and NEVER spend a single penny on it and then sell it 10 years later. All cars need money spent on them, whether its expected or unexpected. The same goes for lots different categories.
Some examples are:
Christmas- It’s on the 25th December every year, plan for it!
Birthdays-Similar to Christmas, birthdays are
School Uniform Costs
How to start Sinking Funds
The general rule of thumb is to work out what Sinking Funds you need, then work out how much you’ll need for each fund, divide by 12 and save that amount every month.
So, if you’ll need £250 a year for car repairs, you’ll divide that by 12 (approx.£20.80) and save that amount every month throughout the year.
Where that may not work is when you’ve only just started SFs and you have a shorter time to save for expenses. For example, it’s September and you haven’t any SF for Christmas, or is August and you haven’t any SF for School Uniform costs.
In that scenario, I would work out the BARE MINIMUM you can get away with spending for that item, and save for that first. It may mean having to scale back significantly on Christmas for example. In 2017, I only spent £250 on Christmas in total. I never thought that was possible, but I managed it. And I’m sure you could manage on an equally low budget, if push came to shove.
At What stage to I set up Sinking Funds?
If you are following Dave Ramsey’s Baby Steps (as I do) then you will start SFs once you are in Baby Step 2 (paying off your debt).
This is not something that you ever stop doing either, it will continue to serve you for the rest of your life.
Where do you keep your Sinking Funds?
It’s really up to you. I keep mine in a separate bank account, and transfer the money to them every month. I don’t have them in a high interest account, I just have them in a cash ISA that I can withdraw from quickly when I need to.
I know of some people who keep their Sinking Funds in cash in their house. If you are going to do this, I highly recommend checking with your house/contents insurance to see how much would be covered by them in the event of an emergency (fire, robbery etc).
I hope that helps!