4.01.2017

Sinking Funds: what they are and how to use them.

Four years ago, we were $75,000 in debt. It was a combination of student loans, credit cards, and vehicles. I did a lot of researching about how to get out of debt, a lot of looking into different budgeting options and a lot of reading about how to curb spending. In my searches, I found Dave Ramsey and read about his baby steps. I watched his videos, started to follow his steps -- and within 2.5 years we paid off over $50,000. But we really wanted a house. Like really wanted a house -- and since that goes against everything Dave Ramsey stands for (since we were still in debt and didn't have any cash savings) -- we stopped doing the baby steps and went rogue. We bought a house, expanded our family, traded in new cars for newer cars -- the list goes on! But there is one thing I continued doing since that day in June of 2013 that saves us every single month: we use sinking funds.

WHAT ARE SINKING FUNDS:
Sinking funds allow you to have money when you need it because you set it aside when you get it. For instance, excise tax -- it arrives yearly and it's terrible -- if your state doesn't have it you're so lucky. Years ago when that bill would arrive (and we had 2 new cars so the bills together would be roughly $1,000) Sean and I would just stare at each other and wince at the thought of paying out of pocket. We'd complain about it and argue talk about how we'd pay it and sometimes it'd be with a credit card and sometimes we'd take from savings and then we'd be left with nothing because our savings was slim to none to start. Sound familiar?! You need sinking funds!

BUDGET YOUR SINKING FUNDS:
I wasn't sure where to start. So I just followed the equation on how to budget for sinking funds anyway. Take a bill that doesn't come as frequently as monthly... so not your electric bill or your cable bill (unless those things aren't monthly) but like your amazon prime membership or your house insurance or Christmas. Christmas is a good example (if you celebrate it and buy gifts for people). Christmas happens every December 25th -- EVERY. SINGLE. YEAR. And yet most people begin their shopping for Christmas on Black Friday and for a whole month they put everything on a credit card because they "have no money" but just HAVE to buy people presents. BUT! If you know it's coming, and you know you'll need to spend money on it, why not set it aside so you DON'T charge it?


To budget for your sinking funds take the amount of money you will eventually need and divide it by the number of months you have until that thing is set to happen. 
That's the amount you set aside each month. 


If you want $1,000 by December 25th and it's January you need to set aside $100 per month into a sinking fund. If you want $1,000 by December 25th and it's June you'll need to set aside (about) $167 per month. 

SET ASIDE YOUR SINKING FUNDS:
I tried a few other options but ultimately I found the easiest way to set aside my sinking funds was to use my capital one 360 account (not affiliated with this blog in any way I just honestly love it). They make it so simple because you can have so many different accounts all under 1 name. You can title the different sub-accounts exactly what you intend to use them for: excise taxes, amazon prime, christmas, etc. You can also set-up automatic transfers so it takes away the guess work or the need to remember how much you wanted to transfer into which account. Once you figure out how much money you need, you set-up the transfers and let the bank store the money for you until you need it. No way to spend it "by accident" because it's in a separate account and since it's labelled very specifically I rarely, honestly -- never, slip-up and spend it on something else. 

THE SINKING FUNDS WE HAVE & YOU SHOULD TOO:
Now, this is sort of a to-each-their-own type of thing. But these are some of the best sinking funds we have and these accounts have saved us on multiple occasions. It's so nice to make purchases and not feel an ounce of guilt because you have to use a credit card and it's even better when bills arrive and you have the money to pay them. It's like you're winning at life. 
The sinking funds under necessary -- sort of self-explanatory. Those bills come periodically, maybe quarterly, maybe yearly, maybe every 7,500 miles -- but they happen. Under the "for fun" category -- those are things I'm going to spend money on regardless. Whether it's new clothes, kid stuff like swimming classes or a wedding gift -- things come up. The extras are things like lightbulbs and new rugs, vet visits for my 3 cats and memberships to things like Amazon prime and American Express. We set aside these sinking funds so that when we want to buy something or pay something -- we can.

Since I keep all the money in my Capital One 360 account, when I do need it I transfer the exact amount over to my checking account (it's instant) and I use my debit card to make the transaction. It's really that easy. Like today -- we needed an oil change. It came to $84 and we used the car maintenance sinking fund. It was a beautiful thing. 

MAKING IT STICK:
Like anything, a habit takes a while to form (supposedly 21 days). You should commit to sinking funds and work on them until you reap the reward. For us, it took about 3 months. In the first 3 months, Sean would say something like "do we have the money to pay this?" and I would say "no, not yet" or "not the whole thing, just part" and he'd say "then why are we taking so much money out of our account every month??" and I'd say "because it's a plan! there's a system! it's going to work!" and he was pretty confident I joined some type of Dave Ramsey youtube cult. But sinking funds WORK. And even though I fell off the Dave Ramsey baby-step bandwagon (I will jump back on one of these days) -- this habit stuck and I love it. Try it and you will too. 

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