Today we’re tackling all those expenses that just don’t fit the monthly mold which budgeting seems to be designed for. Your monthly budget works great for a while, then a quarterly bill pops up and throws it off. The standard budgeting advice is to know how much you should allocate toward those bills each month, then the money will be there when they come due. In practice though, that often leaves money in your checking account that looks free to be spent … and a lot of times, it gets spent.
That’s the real problem, the fact that the money is staying in your checking account. It’s too hard to keep track of that way, and all those non-monthly expenses get lost in the bill-paying wash.
When you’re living on a tight budget, annual fees that you “planned for” then forgot about can really throw a wrench in your finances. Often, you end up dipping into your emergency fund to make up the difference, but that’s not what an emergency fund is for. It’s for emergencies, and these non-monthly expenses shouldn’t be surprises, let alone emergencies.
What you need is a different fund altogether, a sinking fund.
What's a Sinking Fund?
A sinking fund is a place to put the money you need to pay those non-monthly bills. By having a place to put it, you can use your budget to allocate the money for those expenses on a monthly basis AND make sure you don’t accidentally spend it on something else.
If you’re a homeowner, chances are good you already have a sinking fund and just don’t think of it that way. Have you got an escrow account to pay your property taxes and homeowners insurance? That’s a sinking fund that your mortgage servicer manages for you. And it works pretty well, right? You get a property tax bill in the mail, shudder a little at the cost, and then don’t worry about it because it’s taken care of by your escrow account.
Wouldn’t it be awesome to have that nonchalant response to every non-monthly bill that arrives in your mailbox? No big deal, the money’s in your sinking fund, you just pay it without a second thought.
How Do You Keep it Funded?
If you’re following a budget, you’ve already got the tough part of the equation figured out. You’ve already made a list of all your expenses that follow a different frequency than monthly—think quarterly, annually, weekly, etc.—and calculate the one-month equivalent cost. For an annual bill, divide by 12. A little more math will be required for funky intervals, like the hair appointment you schedule every 6 weeks religiously. For weird ones like that, it helps to convert the costs to a full year then divide down to a month. For example:
1 salon bill every 6 weeks ($100)
52 weeks/6 weeks = 8.667 salon bills per year ($866.70)
Annual cost/12 = $72.23 per month.
Your teachers always swore you’d need math later in life and they were right. When you have your monthly equivalent for all the expenses that previously didn’t fit the mold, you’re ready to rock the sinking fund! Each month, instead of looking at those line items on your budget and shrugging, move them out of your main account and into your sinking fund account.
Don't Forget Predictable Expenses
Keep in mind that this fund isn’t just for regular bills, but also predictable expenses. What’s the difference? Your quarterly water bill is due every quarter. The amount may fluctuate slightly, but the due date is always the same. If you have oil heat and live somewhere it gets cold, you know to expect to fill your oil tank at least once each winter. You don’t know exactly when you’ll need to fill up and don’t know exactly how much it will cost, but you can make a good educated guess based on how much you’ve used previous winters and average heating oil costs.
Again, this is something you’re already doing. If you drive a car, there’s some amount you budget every month for gas. You don’t drive the exact same mileage every month, and gas prices fluctuate, but you can make a pretty good guess about how many times you’ll fill up in a month and what it will cost. The amazing thing about a sinking fund is that it’s not an emergency, and having one means your predictable expenses don’t become financial emergencies.
Spend Your Sinking Fund
One of the biggest differences between an emergency fund and a sinking fund is that the sinking fund is meant to be spent. In a perfect world, your emergency fund sits untouched because you never have an emergency. The whole point of your sinking fund is to make paying bills easier.
You will need to make some logistical decisions about how you prefer to manage your sinking fund when you get started.
Will it Be a Savings Account or a Checking Account?
There’s no right or wrong answer, it’s whatever works best for you. A savings account might get you a better interest rate, meaning you’re putting that money to work when it’s waiting for bills to pay. But a savings account won’t have checks or a debit card, so using it to pay bills will probably involve doing a transfer to checking and then paying the bill.
A checking account makes the paying part easier, and if you’ve got GOLD’s Checking Account, the money is still earning interest. The pro might actually be a con though if you struggle with self-control. If easy access means you might dip into your sinking fund for unbudgeted purchases, you might want to stick with the savings option.
How Does it Work When You've Just Started?
So, I’ve convinced you to start a sinking fund. In month one you dutifully transfer the monthly equivalent of all those funky non-monthly bills into your new account, but then one of the big bills is due the same month and it’s more than you’ve got in the account. What gives?
Back to the escrow account example. Did you know you that prefunding your escrow account is part of your closing costs? If you can swing prefunding your sinking fund with 3-6 months funding, you’ll be set. That’s one way to make it work, but it might not be realistic for you.
The important thing is not to let the fact that it’s hard dissuade you from doing it. How would you have paid that big bill if you didn’t have the sinking fund? Use whatever’s in the account, and pay the bill however you would have otherwise. It doesn’t mean it’s not working, it just means you need some time to get to a place where your sinking account is fully funded.
And yes, paying a bill with a credit card or from your emergency fund isn’t ideal, but not paying a bill at all is worse. There’s no judgement here. Budgeting isn’t easy. If it was, everyone would do it and no one would have money problems. If you stick with this system and stick to your budget, you will get to that better place and it will get easier.
I challenge you to give a sinking fund a try for a year. You won’t ever want to go back to life without one.