How To Set Up Sinking Funds
One of the most difficult parts about sticking to a savings plan is that no month looks the same. It’s easy to budget for fixed expenses like your mortgage, phone bill, and subscriptions. With time, you can estimate some variable expenses like eating out and groceries. But it is much more difficult to plan for irregular expenses like out-of-pocket health care expenses, replacing an HVAC, a big vacation, or a broken transmission.
To solve this problem, I suggest setting up sinking funds. Sinking funds are little savings accounts within your larger savings account that are set aside for these expenses, both planned and unplanned. You save into it on a regular basis (each paycheck, once a month, etc), and then deplete it as the expense arises. For example, save $100/month in a Christmas category and then spend $1,200 every December.
There are several ways to set up sinking funds.
(1) You can have separate savings account for each expense. I’m not a big advocate of this because it is a little harder to manage and in general, I prefer having fewer accounts.
(2) If your bank allows it, set up “buckets” within your savings account that allows you to keep one savings account but visually transfer money between the buckets to keep track of separate sinking funds. Ally Bank does a great job with this.
(3) Use a budgeting tool like YNAB or Mint that allows you to carry over funds from month to month in separate budget categories.
Below are frequent sinking funds you might want to set up.
(1) Christmas/Birthday gifts.
(2) Vacations.
(3) quarterly, semi-annual, or annual bills (insurance, taxes, subscriptions).
(4) Home maintenance – I suggest $1 per square foot of home per year.
(5) Auto maintenance – I suggest roughly $75/car per month or more if the value of your car is higher.
(6) Health care – I suggest saving somewhere between your deductible and the out-of-pocket max each year and then stop once you have the out-of-pocket max saved. For example, if your deductible is $1,200 and max is $3,600, save somewhere between $100-$300/month and then stop when you have $3,600 saved.
Thank you for reading,
Alex
This blog post is not advice. Please read disclaimers.