Listen! I like making our finances as simple as possible and planning for future expenses is no exception. That’s why we like the concept of sinking funds, or the sinking pot in our case (more on that later).
If you’re tired of having irregular expenses throw you off of the budgeting bandwagon, this post is for you!
What is a sinking fund?
A sinking fund is basically a revolving savings fund that has sufficient cash to meet monthly and annual anticipated expense needs.
You establish a sinking fund for one main purpose:To accumulate money for non-monthly or irregular expenses to prevent creating a deficit when those KNOWN or planned expenses occur.
Sinking funds are not meant to cover emergencies such as vehicle or home repairs – that’s what your emergency fund is for.
Auto insurance bills (if you pay annually, which could save you money)
Holidays (decorations, gifts, travel)
Birthdays
Vacations
Entertainment (concerts or events)
Property taxes
Back to school shopping
Pet grooming and checkups
Personal medical payments (co-payments, non-covered expenses, etc)
Sinking funds help take the shock out of many larger expenses as well because you save up for them over time. Once the payment is due, you already have the money squirreled away rather than having to scramble to find money to cover the payment.
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Start by listing all of the expenses that you would like to save for.
Set a target date.
Set a total amount to save.
Calculate the number of months you have to save based on the target date.
Divide the total amount to save by the number of months and put the result for each expense into your monthly budget.
Here is an example of what sinking funds look like in our budgeting spreadsheet sets:
The budgeting templates in our shop come with a “goal/sinking fund calculator” pre-loaded to help you track your goals in one place. Use code “ptwlove” to get 15% off of your order because we love you!
Where should you keep your sinking funds?
Where you store your sinking funds is largely dependent on how soon you’ll need the money. I think it’s smart to keep your short term funds stored in an account that’s attached to your primary bank. That way, you can easily transfer money as soon as you need it.
For expenses that are 6 – 12 months in the future, we’d recommend putting those funds into a high-yield-savings account. When your money is stored for a longer period of time, you have an opportunity to earn interest while you wait to use it.
We all like free money, right?
Why you may not even need sinking funds
If your income is significantly greater than your expenses, there’s really no reason for you to have sinking funds since you can cover expenses as they come (unless you just don’t want to).
In our case, we don’t need to prepare for every potential irregular expense that pops up. This is due to the fact that we can cover those random expenses from our monthly leftover money, so we created an alternative to sinking funds.
Our alternative to sinking funds
Instead of taking an expense and dividing it by the time we want to save up for it, we have a sinking pot which is set up similar to an emergency fund. Say we budget for $5k in annual miscellaneous expenses. Each month we just send a leftover chunk of change to our sinking pot until it is full.
Benefits of a sinking pot:
Less complicated because everything is in ONE place.
You can earn extra money from interest on the total balance of your sinking pot if you keep it in a high-yield savings account.
You aren’t tracking a bunch of potential expenses.
Why this works for us
Our biggest irregular expenses are concert/event tickets, vacations, and travel to NC. Due to the nature of DJ’s job, we can’t really plan too far in advance so having 1 big pot to take money from helps us do things on a whim.
Having a monthly fun category and monthly house expense category also keeps our budget in check (most of the time).
That’s it! Pick your version and try it, family, you have nothing to lose. Try out a sinking fund or sinking pot – plan, save and have more peace in your budget.
A sinking fund is basically a revolving savings fund that has sufficient cash to meet monthly and annual anticipated expense needs. You establish a sinking fund for one main purpose: To accumulate money for non-monthly or irregular expenses to prevent creating a deficit when those KNOWN or planned expenses occur.
Sinking funds are used to save for large expenses on the horizon. So, when those expenses arise, it's important that you're able to access the money you've saved for them. High-yield savings accounts are similar to traditional savings accounts in that they give you easy access to your money.
Sinking funds are money you set aside each month for specific savings goals. They allow you to save for infrequent expenses and plan for large expenses over time. Having sinking funds can help prevent you from withdrawing money from your emergency fund or going into debt to pay for things.
A sinking fund adds an element of safety to a corporate bond issue for investors. Since there will be funds set aside to pay off the bonds at maturity, there's less likelihood of default on the money owed at maturity. In other words, the amount owed at maturity is substantially less if a sinking fund is established.
Having sinking funds can help you achieve greater financial flexibility and freedom! When you're well-prepared for future purchases, you'll avoid the need to take on new debt, which could slow your debt repayment progress.
A sinking fund is a very low-risk way of saving money. Because you use a regular checking or savings account to store money in a sinking fund, there's no risk you will lose money like there is if you invest the money.
If buying into a large strata scheme, you would expect a sinking fund to be hundreds of thousands of dollars. Equally, if you are buying into a block of six, the sinking fund could be reasonable with a balance of only $60,000, because it is a matter of proportion.
A sinking fund is maintained by companies for bond issues, and is money set aside or saved to pay off a debt or bond. Bonds issued with sinking funds are lower risk since they are backed by the collateral in the fund, and therefore carry lower yields.
The purpose of the sinking fund is to provide for the orderly retirement of the issue. A sinking fund typically requires no call premium. provision that requires the corporation to retire a portion of the bond issue each year.
A sinking fund is for those expenses you know are coming and can plan ahead for—like your kid's soccer season or the bridesmaid dress you need for your friend's wedding. An emergency fund, on the other hand, is for unexpected expenses.
The sinking fund method is a technique for depreciating an asset while generating enough money to replace it at the end of its useful life. As depreciation charges are incurred to reflect the asset's falling value, a matching amount of cash is invested.
The company would classify the bond sinking fund as a non-current asset on its balance sheet. Basically, its just cash set aside by the company to cover any bond payments it would need to make to holders of the bonds.
The goal of a sinking fund is to accumulate the loan amount so that the loan amount can be paid off in one lump-sum payment at the end of the term. So, the loan amount becomes the future value of the sinking fund.
The body corporate must prepare a sinking fund budget (and an administrative fund budget) each financial year. The sinking fund budget must: provide for necessary and reasonable spending for the financial year. reserve an amount to meet likely spending for at least 9 years after the current financial year.
As per the Bye Law No. 13 (C), “The General Body can decide the Sinking Fund contribution, subject to the minimum of 0.25% per annum of the construction cost of each flat incurred during the construction of the building of the Society and certified by the Architect, excluding the proportionate cost of the land”.
What are three reasons why sinking funds are attractive to both issuing firms and investors? They support the market price , The bond because they reduce the risk the bond will not be repaid, they reduce the risk the bond will not be repaid, the provide for an orderly repayment of a bond issue.
A sinking fund is maintained by companies for bond issues, and is money set aside or saved to pay off a debt or bond. Bonds issued with sinking funds are lower risk since they are backed by the collateral in the fund, and therefore carry lower yields.
Sinking funds allow you to avoid using a credit card or personal loan. Instead, you anticipate the cost and save enough to buy the item. Other benefits of starting a budget for sinking funds include: Having enough money to cover your expense without going into debt.
Introduction: My name is Allyn Kozey, I am a outstanding, colorful, adventurous, encouraging, zealous, tender, helpful person who loves writing and wants to share my knowledge and understanding with you.
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