A few years ago, I discovered the sinking fund budgeting method on the Daily Money Shot blog. It was in the early days of blogging on Odd Cents and I was an active reader of several personal finance blogs. At that time, I had a rotation of blogs that I used to visit every week and the Daily Money Shot was one of them.
Jana, the author of the blog used to outline how she budgeted her pay cheques and allocated funds to different accounts. I always found it interesting how she would allocate one or two dollars to savings or to car insurance or some other expense that was sure to come her way. I though that it was a great idea at the time, but I was on a pretty successful budget and I did not want to change how I was planning my money.
But as time went on, and more expenses came my way, I decided that it really was time to change the way my budget worked. I needed to find a way to make dealing with my expenses a bit easier. I had taken on a few big expenses and dealing with them was not easy. It was very stressful trying to figure out where I was going to pull money from to cover my big bills.
I remember coming across an article about sinking funds and the Daily Money Shot came back to me. This was exactly what I needed.
What is Sinking Fund Budgeting?
Sinking fund budgeting is a method where you set aside funds each month for an annual (or longer term) expense. It is a way to simplify your budget and share the burden of expenses throughout the twelve months of the year. The sinking fund is not an emergency fund, however, it is a plan for known expenses.
Benefits of Sinking Fund Budgeting
The sinking fund budgeting method was everything that I needed and more. This method allowed me to budget for my larger expenses, adequately allocate my money to annual expenses and equally share my income among my expenses and savings, so that I could save each and every month. As a result, I was able to enjoy several benefits that made my life so much easier.
1. My Expenses Are Paid On Time
Because I am saving throughout the year for my expenses, I always have the money in account to cover them. As a result I do not have to worry about late fees and penalties because I can pay off my expenses in full and on time.
2. I Avoid Unwanted Financial Stress
Sinking funds budgeting has allowed me to avoid severe financial stress. I can relax a bit knowing that when those expenses rolled around, I could pay them without worrying about where the funds were coming from.
How to Create Your Own Sinking Fund Budget
I found that the sinking fund was the perfect way to save for my expenses, especially because my funds were tight. I could plan for a number of expenses and not have to worry about how they were going to get paid. Right now, I’m saving for property taxes; property insurance; vehicle expenses (including my licence); health expenses (medical, dental and optical); and professional designation renewals. In the past, I’ve saved for travel, gifts, exams and special events. Truth is, you can save for anything with your sinking fund.
Here are the basic steps that I took to get started with sinking funds budgeting. Admittedly, it was hard the first month because it was a change from the usual. I had to completely shift my mindset and how I looked at and prepared my budget. But it was worth it and I would recommend that you give it a try.
- Make a list of all of your annual expenses
- Write down the due dates for all expenses
- Write down the annual amount due for each expense
- Calculate the number of months you have left before the expenses are due
- Calculate the monthly amount to be set aside for each expense by dividing the annual amount by the number of any months you have left before the due date.
- Put this figure into your budget
One tip that I found helped me as I went along, was to add $5 to each line item in my budget. This allowed me to prepare for increases in my expenses. Even though every item does not increase, it is a good idea that can be helpful if you want to stay ahead of rising expenses.
Get Started with the Sinking Fund Budgeting Method
Do you want to start your sinking fund? Check out these articles which explain the method in even more detail:
- Sinking Funds: The Secret to a Successful Budget & Reducing Financial Stress (Funding Cloud Nine)
- Use Sinking Funds to Transform Your Finances (Slow Motion Mama)
- What Are Sinking Funds and Why You Need Them (Budgets Made Easy)
- All About Sinking Funds & Why I Think The Sinking Pot Is Better (Pennies to Wealth)