It’s August already, can you believe it? I’ve already seen people announcing that there are only142 days until Christmas. I mean, like really?!? But without clicking away too soon, let’s talk Christmas just for a second.
Each of us handles Christmas differently. Usually, I’ve started purchasing my Christmas gifts already, but there have been some unexpected expenses this year. But when it comes to Christmas one of my favorite thoughts on Christmas comes from Dave Ramsey’s Financial Peace CD’s. I distinctly remember in one of them, he talked about Christmas. The gist of that portion of the lecture went something like this: ‘Some of you act like Christmas takes you by surprise each year. Well, I’ve got news for you. It’s December 25th each year! It’s not like all of a sudden on December 24th you think, “Oh no! They moved Christmas to tomorrow?!? I had no idea.” ‘
Sinking Funds
There is a super simple way to handle Christmas each year! It’s called a sinking fund. Uhuh, I see you scratching your heads. What’s a sinking fund? According to Wikipedia, “A sinking fund is a fund established by an economic entity by setting aside revenue over a period of time to fund a future capital expense.” Okay, that sounds a bit like gibberish, so let me unpack it plain English. You know that you’ll have a certain expense in a given amount of time. You save for it monthly until you have enough money put back to cover the expense.
Let me unpack it even father for you with the Christmas example. For my family of 7, I tend to spend around $100-$150 per person on Christmas. That’s roughly $1000 for Christmas spending. If it’s January, and I know that I plan on spending $1000 on Christmas, I should be saving $84/month. If I do this, by December of that same year, I’ll have $1000 put back, so I can spend that on Christmas money. That is a sinking fund. Each month, I put a set amount of money aside so that when I need the money, it’s already there, and I can pay for it from my bank account, and not with a credit card.
Examples of Sinking Funds
Property Taxes and Homeowners Insurance
We use sinking funds for several different items. We don’t have escrow on our mortgage. We have to pay our taxes and our homeowners insurance ourselves. I know about how much our taxes and insurance will be, so I set up a sinking fund and put a specific amount of money into that fund each month. When it comes time to pay my homeowner’s insurance in February, all the money I need will already be set aside. When taxes roll around in June and September, I won’t have to worry where the money will come from. I will have it in my bank account.
Vacations
We don’t take a vacation every year, but we try to at least every other year. Now that we are into our new house and are established, we set up a sinking fund for next July’s vacation. I know how much money I want to have on hand for our vacation, so I’ve divided it up amongst all the months between now and then. I know exactly how much money I need to set aside in this sinking fund each month.
Vehicle Repair / New Vehicle Fund 
We know that we have a couple of large ticket items coming due for our cars (timing belt anyone?) Yea, let’s just say that’s not something I want to break on us since it will destroy our vehicle, and we cannot afford (at this point) to replace it because we don’t take out car loans. Knowing the cost of the maintenance issue, we can set aside money each month until we have it taken care of.
Income Tax Preparation
This is becoming more of a big-ticket item for us especially with us running a business. Our budget can absorb a certain amount of unexpected expenses each month, but with our income tax preparation costing us a lot once a year, we’ve chosen to set one-twelfth of that each month instead of trying to absorb that much all at once.
Homeschool Supplies
Once a year, I have a month or two where I’m purchasing new curriculum and school supplies for our children. This can take a chunk of change! I also roll lessons and other things into this account. Setting money aside for this (sometimes) large expenditure each month makes great financial sense. We also have a separate sinking fund for our homeschool legal counsel. We’ve never used it in our seven years as members, but I’m always thankful that I have it!
Car Tags
I don’t know what state you live in, but here in Illinois, we have to pay $101 each year to get a new year sticker for our car. Highway robbery? Yep, but if I want to drive without being pulled over, I have to pay it. We have 2 vehicles, so I have to fork over $202 each year. How do I do it? Via a sinking fund.
Emergency Fund
Besides all these specialized ‘accounts’ or ‘line items,’ we also have an emergency fund. We are trying to get it up to 1 month’s living expenses. We have a goal and a timeline, so we can use a sinking fund to get us there!
Down Payment
Are you looking for a great way to get the down payment that you’ve been wanting? A sinking fund will help you get there. If you give yourself a time goal and a goal amount of money, you can determine how much money you need to sink into it each month.
And of Course………..Christmas
The good news is that it’s “ONLY” August and you still have time to set up a sinking fund for this year’s Christmas.
My Sinking Fund Tool
I have a tool that is amazing at helping me set up, track, and maintain my sinking funds. I’ve mentioned this tool here before. It’s called YNAB or You Need A Budget.
How does YNAB help me with my sinking funds? In YNAB, I have a category group called “Sinking Funds.” Under this category group, I have the sinking funds listed above. So having specific categories really helps, but YNAB goes further! It gives you the option of setting a goal for each category. Maybe I want to keep my Emergency Fund at a specific amount of money. I can tell YNAB my goal. This could be anywhere from $5 to $5,000 or more!
But they also have a feature where you have to set a target amount of the category AND the month by which you want to have that category up to your goal. When I do this, It will tell me each month, what I need to deposit for us to make it to the goal on time. If I don’t deposit that amount into that category that month, the color of the numbers for that category turn from green (green is good) to yellow (caution). It reminds me that I need to deposit more money into that account in THAT month.
Sinking Fund Ideas
- Furniture purchases
- College funds
- Planned surgery
- Large purchases such as exercise equipment
- House repair/remodel
- Landscaping
- Sun Oven
- Berkey Water Filtration system
- Air Conditioner/Heating System repair
- Appliance replacement
- Concealed Carry Permit
- Self-Protection (i.e. gun)
What About You?
Had you ever heard of a sinking fund before? If you did, had you ever used one? In which ONE category from your current budget could you currently most use a sinking fund?
Remember, knowledge isn’t just knowing something. It’s living it!
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This is a revamped article which first appeared on A Year Without the Grocery Store in October 8, 2018.
THANK YOU for addressing this topic. I read a lot of planning and budgeting blogs and the worst posts are well intentioned mom bloggers that set out to tell readers how to do a budget. But they ALL forget about once-a-year expenses like vacations, taxes, holidays that take a huge chunk of money. It irritates me to no end because it’s not helpful to the reader to exclude these important considerations. So thank you for a dedicated post on the subject!
We escrow our property insurance and taxes. In addition, I have a set amount automatically transferred out of the checking and into three spots – our savings, our IRA, and our kids’ college fund. Because it’s an automatic transfer, we pay ourselves first, the money’s going where we need it, and I barely have to think about it.
Greendoor, one other cool thing about YNAB is that one of their preset categories is “Stuff for Which I Forgot to Budget.” When I was starting out, that was hugely helpful because so often people don’t think about EVERYTHING that they really do need to budget for, ya know?
I like this idea. My income and expenses are changing so I’m reworking my budget over the next couple of months. I’d like to get another car next year and give mine to my daughter, so this would be a good start for that. Thanks!
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