Have you ever been faced with a large expense for which you were unprepared?
I have. It gave me a sinking feeling.
Sinking itself isn’t always a bad thing. The term “sinking fund” originally referred to a dedicated reserve a corporation would set up to repay a debt, contributing funds on a regular basis to build up the needed amount.
Many individuals have adapted the idea to manage their personal finances: having a sinking fund may help us avoid that sinking feeling.
This idea came in handy as I recently set out to see how well the sources for my retirement income were matching up with my expenses. My home has a new roof, won’t need another for many years. My vehicles are fairly new; they won’t need to be replaced for years, either.
But the fact is, someday I will need to pay for a new roof. I will need to replace a car. Furniture and appliances wear out. More predictable but “lumpy” expenses happen, too, like property taxes and planned travel.
If my budget fails to account for these items, my budget is not really covering all of my living expenses, is it? The answer is a sinking fund, as in these examples.
- Home maintenance. If I sink $200 for repairs and such into a sinking fund every month, I would have $12,000 every five years. That should cover a new roof ten or fifteen years from now… or deductibles on storm damage… or a chance to repaint when needed. Likewise, $100 monthly should cover whatever appliances or furniture need replacing: that’s $12,000 over ten years.
- Transportation. Piling $350 monthly toward vehicle replacement ought to pile up to enough to buy a car when needed, years down the road.
- Annual needs. By adding in one-twelfth of my property taxes and one-twelfth of the annual travel budget each month, my sinking fund should be able to handle most anticipated lumpy expenses, in general.
I don’t know when the dryer will need replacing—or what else might break!—but I should have the funds to meet the need. And in any of these scenarios, if the balance gets way ahead of likely expenses, I could always pare back the monthly deposit, direct that money elsewhere as I see fit.
There are different ways to do sinking funds. I set up a monthly automatic transfer into my LPL Financial brokerage account, where the funds will go into an insured cash account until needed. If you would like to set up a sinking fund for your lumpy expenses, email us or call.
Want content like this in your inbox each week? Leave your email here.
Play the audio version of this post below:
