How to get your finances under control with sinking funds
Strength and dignity are her clothing,
and she laughs at the time to come.
I have to admit, I have a lot to learn from the Proverbs 31 woman who was prepared for the future. For instance, when the snow flies I typically start rummaging through the winter clothes only to find that everyone’s snow boots are a size too small.
In the area of finances, however, I have learned to plan for the future as much as our budget allows. Since we live on a modest income, this ensures that we save up for larger purchases or once-annual payments gradually, instead of the budget being tight (or, more realistically, going over budget) when it comes time to pay.
What is a sinking fund?
A sinking fund is a savings account for a specific expense that you know is coming down the pipeline. This is different than retirement or education savings accounts. Here are a few examples:
Amazon Prime fee
Travel / vacation
Summer missions trips
How sinking funds save my budget
Our main goals for our budget are to be able to care well for our family, give generously, and live debt-free. When large, planned expenditures come up that we didn’t save up for, the easiest thing is to reach for the credit card. The second easiest thing is to dip into emergency savings. I avoid both of these bad options by creating sinking funds to pay ourselves back for planned larger purchases.
If we know there is a need coming up that will be expensive, then we plan it out by putting small amounts of money in an account over time, and only purchase that item when the money is there. It’s like a savings cash envelope system.
How I use “sinking funds” for annual or infrequent expenditures.
We have used Capital One 360 for many years for our sinking funds because I can create as many savings accounts as I want to. Each of those accounts can have an automatic savings plan, and you can transfer instantly between accounts. I can add a nickname to the accounts, and can change it anytime. I also have my business checking account attached to my Capital One umbrella account.
As you can see, I have 15 savings accounts through Capital One! (I don’t think there is a limit to number of accounts.) It takes about 2 days to transfer money from Capital One to our main bank, Chase. I use Chase for daily banking instead of Capital One because it is a more accessible bank in my area when I need cash.
I’m going to talk through each of these accounts so you can get an idea of how we use sinking funds. Some people have way fewer accounts than we do, but we need all of these at present!
Everyone should have an emergency fund with cash available for emergencies. Typically what is recommended is 3-6 months of income in your emergency fund. We usually have a little less than this – about 3 months of budgeted expenses instead of income. This emergency fund has served us well for 8 years now, and kept us out of consumer debt. When we need to borrow emergency money, we pay it back as soon as the next paycheck comes in, or if it’s a larger amount, we pay it back in installments. This would be similar to credit card payments, except that we don’t owe interest and we are paying ourselves back – so much better, right?
Life Insurance, Every Dollar
These sinking funds are for once-per-year expenses. We pay $99 annually to budget using the Every Dollar app. Each month my sinking fund withdraws $8.25 from our checking account. The same happens with our life insurance, the bill comes annually, and we are always ready with the funds safely tucked away in this sinking fund.
Gifts and Christmas
We always seem to go over budget at Christmas. Can you relate? No matter how simplified I think we will do Christmas, it all adds up from food to decor to gifts. Having a sinking fund for Christmas gifts has been a budget-saver for us so we don’t use up our emergency fund on this non-emergency. We don’t put a lot of money in each month, and we keep our gift-giving at a modest level. Having a nest egg for Christmas gives us a built-in budget for our holiday spending.
If you are a part of an evangelistic church like we are, you probably begin receiving summer mission trip letters beginning in the springtime! Since my husband is a college pastor, we receive at least 10 of these letters annually. If we don’t plan ahead, it’s really a stretch to help out our friends on their mission trips. Each month through the year we set aside a small amount into this fund so it’s ready to go by the spring. In our budget, we add this monthly amount in with the other missionary support we send out monthly.
Car and Home Repairs
We usually have a large expense of some sort in this category that we are saving for. A small monthly amount is withdrawn from checking to this account, but we also dump in extra money when we get some unexpected or over-budget income. We wait to start a home repair project or to take the car in for body work until we have the funds in place.
This is where we save up for business taxes.
If you have small kids you know how many times you get a birthday card in the mail with money in it, from far off relatives who love to spoil! Instead of spending this money right away, I deposit the money into each child’s savings account. This way I can choose a nicer toy to save for, or the older kids can put in some allowance money and some savings to buy a new Lego set or to go and see a movie. We don’t typically purchase toys for our kids except at Christmas or birthdays, but they can buy a few things for themselves at other times of the year.
We don’t put a lot of money toward travel each month, but even setting aside small amounts at a time takes the edge off when our family goes on a trip. We usually have a free place to stay, and our savings goes to food, fuel, and activities. Since we are in ministry, this money also helps with retreat costs, which roll around twice a year.
We are committed to living debt-free, other than our mortgage (which we would also love to be rid of). This means that we are trusting the Lord to provide for my husband’s tuition and travel expenses for his distance PhD program. So far, the Lord must deem it His will for Jerod to work toward this additional theology degree, because He faithfully provides the money through my business income. I deposit the money into this account each time I get paid.
I have become increasingly aware that non-organic mattresses can be a health hazard. Aside from purchasing one Tuft and Needle mattress (which is still a health compromise), we haven’t replaced our home mattresses. Since our youngest is still in a crib, I am saving up so she can have a healthier twin mattress when she is ready.
I set aside money in this account to save up for larger purchases for my business, like a camera or computer.
We currently use Medi-Share for my husband and my health insurance. Medi-Share doesn’t qualify for an HSA plan, but we chose a higher deductible, so we set up our own savings account with an automatic monthly deposit as a buffer for future medical expenses.
If you haven’t been using sinking funds, I suggest giving Capital One 360 a try. I’m not getting paid to say that, I just genuinely love using their savings accounts. Be sure to include your monthly savings withdrawals in your zero based budget.
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