SINKING FUNDS
If you've read through my previous posts, you will have seen me go on and on and on about sinking funds and how much of a game changer they are!
(if you haven't read my posts, what are you doing with your life?!)
If you're not familiar with what a sinking fund is and how it can help you, this one is for you!
A sinking fund is effectively a saving pot for life's larger expenses.
You know, the ones which come about every so often or even once a year but still manage to catch you off guard when it comes to paying for it and send your budget into turmoil!
This could be anything at all; Birthday presents, Christmas gifts and activities, the Christmas food shop, car tax, servicing & MOT, dentist appointments, school holidays, new Glasses, insurance, wedding anniversaries and occasions etc.
Even though they are regular expenses which we know will come up, we may not have always planned for them, resulting in needing to reach into the Emergency Fund, overdraft or for the credit card!
Sinking funds have saved me so many times and I genuinely think they're one of the most important areas of my budget. In December last year for example, I had Christmas to pay for, my husband's birthday, holiday spending money and new car tyres. These were all covered by sinking funds meaning what is already an expensive month wasn't totally screwed!
So how do you start a sinking fund?
1. List out all your larger semi-regular expenses (use my post above for guidance but you may have others too due to your lifestyle)
2. Work out how much you think you will need for each sinking fund when it comes to needing to pay for it
3. Work out how many paydays you have between now and the time the cost is due and minus 1 from that number. Do this for each sinking fund
4. For each sinking fund idem you have, take the amount from Step 2, and divide it by the number in Step 3. This is how much you will need to put away per month for each one!
For example, you may want to save £300 for Christmas this year. Assuming you are paid monthly, and start this payday (August) there are 4 paydays left, but you will need the money before the last payday as it will be too late by then. Therefore there are 3 paydays to have it in time. £300 divided by 3 months means putting £100 per pay away to have what you need!
I treat my sinking funds as a bill, so no matter what I always pay into them each month before allocating my spending and saving money.
I find when I have saved for a specific reason I don't then feel the temptation to dip into it and spend the money, because I know I am stealing from future me if I do that.
Also, when the cost does come around I know I have it covered already, so for me things like the anxiety on Car MOT day have now disappeared!
Let me know what you think in the comments!