Sinking Funds

pointsin2016

I have been looking at a couple of budgeting videos on you tube and a lot of them have a ton of sinking funds. I really don't understand the concept of having sinking funds and I am curious to know if any of you have sinking funds and if so, what categories do you have them in and when do you use it? 

brij2006

The purpose of sinking funds is to have the money there, waiting to be used, for expenses that you know will happen but don't happen on a monthly basis.  Such as annual property taxes, new tires for a vehicle, semi-annual car insurance, Christmas, vacation, etc.  It's also a good way to build up a little savings for things that don't happen on a monthly basis but you know can happen.  Some people have them for car or home repairs as well, so when their vehicle needs an unexpected repair, they can dip into that sinking fund rather than the emergency fund.

We have sinking funds for a ton of stuff:

Annual car, home, and life insurance (get a steep discount for paying this way)

Christmas

Beef and Pork (we buy in bulk from local farmers once a year)
Summer vacation

Tires for vehicles

License renewals for vehicles

Property taxes

hoffse

We have two kinds of sinking funds. First, we have a fund for things like annual dues where you know you have to pay something once or twice a year.  You divide the annual cost by 12 and put that amount into a fund each month.  Then when it's time to pay, the money is already there.

The other type of sinking fund is money you aren't totally sure you are going to spend, but you anticipate needing at some point.  This is for things like car repairs - you don't know when they are going to pop up, but at some point you will need money for those things.  If you don't save for it each month, then it's a PITA.

So basically a sinking fund is money you are rolling over month to month so that it's there when you need it.

We have the following sinking funds:

Annual dues - $500/month.  This is a lot higher than what most people have to do, but we have several thousand dollars of annual dues for civic organizations that goes into this.  This also includes our Costco and Amazon memberships, our termite bond, our life insurance premiums, etc.  It also includes a $500-$1,000/year buffer for car repairs or tires.

Clothing - $300/month.  Again, pretty high, but we are both attorneys and have to dress the part.  H goes to court frequently, so he has to wear a suit every day.  This is the first year we've done one for clothing, so we'll see if we have to adjust up or down for next year.

Gifts - $100/month.  We use these mostly for weddings/babies.  Whatever is left at the end of the year we use for Christmas gifts.

orangehills

This is what I'm working on now. We already have a fund for the car insurance/registration and maintenance. Now that our efund is where we want it,  I'm working on making a decent sinking funds for vacation, and clothing/gifts. 

brij2006

hoffse said:

Annual dues - $500/month.  This is a lot higher than what most people have to do, but we have several thousand dollars of annual dues for civic organizations that goes into this.  This also includes our Costco and Amazon memberships, our termite bond, our life insurance premiums, etc.  It also includes a $500-$1,000/year buffer for car repairs or tires.

I'll trade you!  We put aside $500/month just in insurance premiums each year.  It's insane!  I even re-shop them once a year.  Can't find anything cheaper. We even do a separate $60/month for our life insurance.  

cbee817

The only sinking fund we have is for vacations- it's in a separate account at a credit union. Our property taxes/home insurance comes from our escrow account, car insurance and life insurance are paid in a lump sum once a year (July and February). If we need extra money for that, we just take it out of our large savings account, but it usually fits into the monthly expenses. 

Our savings account currently covers about 5 months of expenses so if there is something we want to do (we plan to gut our upstairs bathroom this summer), we'll take the money out of that account for it.

AprilZ81

We have several:

-Car Insurance & Car Repairs

-Gifts/Christmas

-Vacation

-ROTHs

-Clothes

-General Items like Costco, Amazon Prime, Sirus Satellite Radio, lawn treatments and a bit more for cushion.

-Home Improvement: This is for small things like a chimney cleaning or a new light fixture.  Big projects we save up for and use a general savings account.

The biggest thing to consider (in my opinion) is to pay attention to when these bills are due.  If you start in March with sinking funds and your annual car insurance bill is due in June there is no way you will have the money if you are only saving 1/12 of the amount every month.

Once you get started it makes life a lot easier as long as you can keep track of where the money is sitting and what has been spent.

ThinkingCapital

Sinking funds are a great idea that can keep you from being "caught short" when certain expenses come around. Not only are they good for bills that you owe only once or twice a year (car insurance, etc.) but also for things like birthday and Christmas presents. It's a bit different from an emergency fund (since you know specifically where the money is going) but the general idea is the same: Save now so you don't have to go into debt to afford expenses later.

LillibetteV

We have one sinking fund and we lump everything in there together - annual car insurance, home repairs, car repairs, and vacations. I eventually want to set up separate accounts for vacation and home renovations though. 

We also are somewhat conservative in our savings transfers to account for utility fluctuations (yay New England weather!) so if we have a few low spending months we end up with a big checking account buffer that often allows us to cash flow a lot of the things that would normally come out of a sinking fund (such as our car insurance this year). How would you all account for that? 

dragonstarjk

We have several and they are all funded automatically every payday:

Vacation fund

Home improvement/repair fund

Car fund--this would include insurance and also maintenance

Shopping/gift fund

kmurphy2131

LillibetteV said:

We have one sinking fund and we lump everything in there together - annual car insurance, home repairs, car repairs, and vacations. I eventually want to set up separate accounts for vacation and home renovations though. 

We also are somewhat conservative in our savings transfers to account for utility fluctuations (yay New England weather!) so if we have a few low spending months we end up with a big checking account buffer that often allows us to cash flow a lot of the things that would normally come out of a sinking fund (such as our car insurance this year). How would you all account for that? 

The problem I see there, is that you have a buffer in your checking account because you have low utility costs for a couple months.  Then you use that money to pay for your car  insurance.  What happens when you then have a month with higher utility costs?  

I let that buffer on my low utliity months carry over and keep it with my utilities because they will inevitably get high again. I do my car insurance as it's own sinking fund.

vlagrl29

Our sinking funds - HOA, home owners insurance, property taxes ( house and 2 cars), car insurance, personal property insurance, life insurance on both of us, DD's dental exams twice a year, dogs annual vet visit, taxes.

LillibetteV

kmurphy2131 said:

LillibetteV said:

We have one sinking fund and we lump everything in there together - annual car insurance, home repairs, car repairs, and vacations. I eventually want to set up separate accounts for vacation and home renovations though. 

We also are somewhat conservative in our savings transfers to account for utility fluctuations (yay New England weather!) so if we have a few low spending months we end up with a big checking account buffer that often allows us to cash flow a lot of the things that would normally come out of a sinking fund (such as our car insurance this year). How would you all account for that? 

The problem I see there, is that you have a buffer in your checking account because you have low utility costs for a couple months.  Then you use that money to pay for your car  insurance.  What happens when you then have a month with higher utility costs?  

I let that buffer on my low utliity months carry over and keep it with my utilities because they will inevitably get high again. I do my car insurance as it's own sinking fund.

We budget based on the highest month so we are never in a position that we've come up short, even when we have subzero weather for days on end in a drafty old house. Right now I have the annual car insurance that was due in January sitting in the sinking fund (because we cash-flowed it) PLUS we're still adding to the sinking fund at a rate to cover next year. Maybe I should listen to my husband and let us take an epic vacation hahaha

kmurphy2131

LillibetteV said:

kmurphy2131 said:

LillibetteV said:

We have one sinking fund and we lump everything in there together - annual car insurance, home repairs, car repairs, and vacations. I eventually want to set up separate accounts for vacation and home renovations though. 

We also are somewhat conservative in our savings transfers to account for utility fluctuations (yay New England weather!) so if we have a few low spending months we end up with a big checking account buffer that often allows us to cash flow a lot of the things that would normally come out of a sinking fund (such as our car insurance this year). How would you all account for that? 

The problem I see there, is that you have a buffer in your checking account because you have low utility costs for a couple months.  Then you use that money to pay for your car  insurance.  What happens when you then have a month with higher utility costs?  

I let that buffer on my low utliity months carry over and keep it with my utilities because they will inevitably get high again. I do my car insurance as it's own sinking fund.

We budget based on the highest month so we are never in a position that we've come up short, even when we have subzero weather for days on end in a drafty old house. Right now I have the annual car insurance that was due in January sitting in the sinking fund (because we cash-flowed it) PLUS we're still adding to the sinking fund at a rate to cover next year. Maybe I should listen to my husband and let us take an epic vacation hahaha

Oh thats different then.  We budget for the highest month too - but it still doesn't work out to more than 25-50 extra one or two months a year - not a year of car insurance!  

If I had a sinking fund for my car insurance ,and it was full & my premium wasnt due for a year,  wouldn't keep adding to it

LillibetteV

kmurphy2131 said:

LillibetteV said:

kmurphy2131 said:

LillibetteV said:

We have one sinking fund and we lump everything in there together - annual car insurance, home repairs, car repairs, and vacations. I eventually want to set up separate accounts for vacation and home renovations though. 

We also are somewhat conservative in our savings transfers to account for utility fluctuations (yay New England weather!) so if we have a few low spending months we end up with a big checking account buffer that often allows us to cash flow a lot of the things that would normally come out of a sinking fund (such as our car insurance this year). How would you all account for that? 

The problem I see there, is that you have a buffer in your checking account because you have low utility costs for a couple months.  Then you use that money to pay for your car  insurance.  What happens when you then have a month with higher utility costs?  

I let that buffer on my low utliity months carry over and keep it with my utilities because they will inevitably get high again. I do my car insurance as it's own sinking fund.

We budget based on the highest month so we are never in a position that we've come up short, even when we have subzero weather for days on end in a drafty old house. Right now I have the annual car insurance that was due in January sitting in the sinking fund (because we cash-flowed it) PLUS we're still adding to the sinking fund at a rate to cover next year. Maybe I should listen to my husband and let us take an epic vacation hahaha

Oh thats different then.  We budget for the highest month too - but it still doesn't work out to more than 25-50 extra one or two months a year - not a year of car insurance!  

If I had a sinking fund for my car insurance ,and it was full & my premium wasnt due for a year,  wouldn't keep adding to it

Yup - that's living in Boston for you! Our swing from lowest to highest month is about $250. Winters are freezing and even though the summers are hot we don't have central AC so that keeps our bills low compared to winter. This thread is really making me want to separate all these sinking funds out into separate accounts so I can visualize it all better. 

pointsin2016

thanks for all of the feedback! I am going to re-do our budget!