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The last few weeks we've been talking about the "B" word...BUDGET. It's a friend to many, but a far greater number of people absolutely hate the idea of it.
I've been both of those people at different times in my life, but I am now a firm believer in budgeting and will never go back to life without it.
It has taught Keith and me an incredible amount of discipline and our financial lives reflect it.
As we have learned more and more about how to lead a life of Christ-centered financial wellness, we discovered another aspect of budgeting that we now embrace wholeheartedly. It has come to the rescue more times than I ever thought possible and I'm excited to introduce it to you today. It's called the sinking fund.
Let’s walk through the 3 things you need to know about sinking funds.
1. What Is A Sinking Fund.
It's basically a savings account, but is earmarked for a specific purpose. The goal is to set aside a small amount of money on a consistent basis in order to fund some “thing” in the future. By setting aside a small amount over time, the purchase will be so much easier to manage when the time comes.
We have had several sinking funds over the years. Below are three of our favorite.
Car repair sinking fund. We put money aside each month for routine maintenance. The typical amount is $125, but we increase it when we're saving for a larger expense item like tires. In those instances, we will add to the base amount for a few months until we have enough money to pay cash for the expense. Once the purchase is complete, we go back to the base amount.
Summer camp sinking fund. We also put aside a little money each month for the kids' summer camp. Proverbs 16:27 TLB says "an idle mind is the devil's workshop; idle lips are his mouthpiece." As a result, we don’t want the kids sitting at home all summer with nothing constructive to do. However, camp can be expensive.
Before we started using sinking funds, paying for camp was a huge money drain. After we set it up however, we were amazed at how freeing it felt to make our camp selections.
It also alleviated the frustration over how much to spend for camp. At the end of the summer, we would assess each camp to determine if we would use it again the next year. If it wasn’t a good experience overall, we would replace it.
As we looked for replacement camps, we would adjust the amount of the sinking fund to accommodate the new amount. This became especially important as the kids got older and fewer free camps were available.
Car savings sinking fund. We also have a car savings sinking fund. Currently the balance in this account is zero because we are not actively saving for a vehicle. But for the first few years of our marriage, we put aside $300 every month to save for a replacement vehicle.
Both of our cars had over 200,000 miles on them when we started our debt snowball and we knew there was a good chance we would have to replace at least one of our cars before we finished.
As it turns out, we had to replace them both...within 3 months of each other. We had $5500 in our sinking fund. We used the car savings and car repair sinking funds, along with our emergency fund to pay cash for two vehicles in 3 months.
NOTE: If your vehicle is in good condition and you are working through a debt snowball, I recommend limiting the car savings sinking fund until you are out of debt.
Also, remember that the sinking fund amount determines what kind of car you can purchase. We purchased a 2004 Volvo which had a 125,000 miles on it and 3 months later bought a 1995 4Runner with over 200,000 miles on it because those vehicles fit the amount of money available at the time of the purchase.
I realized after the purchase of the 4Runner that had we not been living a life of Christ-centered financial wellness, we would have used debt and would be the proud owners of two car payments. It was a sobering thought and once again I was thankful the sinking fund had made it possible to not incur any new debt.
2. Where do you save the money?
Dave Ramsey teaches that savings is different from investing. Savings is designed for short term items or the emergency fund. Investing is designed for long term items like retirement or college funding. If you think you'll use the money sooner than 5 years, simply keep it in a savings account or money market account. It will not earn much money, but it won't lose much money either. The goal is to make sure the funds are actually available when you need them.
We went against this advice with our car savings sinking fund and it ended up regretting it. We were impatient and decided to “invest” our sinking fund in mutual funds. Sure enough, less than 6 months later, the first car died and we had to pull out all of the money. Fortunately we did not lose any, but we did see the lesson in the experience. Since then, all of our sinking funds are in simple savings or checking accounts.
3. When does a sinking fund have enough?
It depends. We never cap our car repair sinking fund because we know we’ll eventually need it. The others do have a cap and I encourage you to do the same. The key is to keep your goals in front of you at all times. Sinking fund purchases are only a portion of your overall goals. The key is to think through everything you want to do in the next few years and make your decision accordingly.
Also, keep in mind that all money which goes to sinking funds is then not available for other parts of your budget. If you are working a debt snowball, I encourage you to limit the funding of too many sinking funds.
Proverbs 21:20 tells us “the wise store up choice food and olive oil, but fools gulp theirs down.”
Using sinking funds is the wise thing to do and they have been instrumental in our financial growth.
We use them ourselves and teach our financial coaching clients to do the same.
If you’d like to find out more about them, feel free to reach out and we can use your FREE consultation to expand your knowledge.
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Until next week...be well...be encouraged.
