We’ve all done it. Spent time mapping out the perfect budget; each dollar accounted for, it’s neat and tidy. Then the 11th hits and your car tags need to be updated, the yearly insurance payment is due, and you forgot a birthday. Somehow a perfect budget gets blown, and even though you knew each of those things would come up, you weren’t prepared. That’s where sinking funds come in. 

Every year we have expenses that only come up once or twice. Here are some examples of things that you may need a sinking fund for. 

  • Yearly or bi-annually insurance
  • Christmas (for gifts and decorations)
  • Birthdays (for gifts and decorations)
  • Anniversary (for gifts and decorations)
  • Trips/Vacations
  • Kid’s school bill (many schools will give a discount for paying in full before the school year begins)
  • Car Tags

I’m sure you can find some examples in your own life that I haven’t mentioned here. Some of these are wants, and some are needs. You need home insurance. You want an anniversary gift. Regardless of what the expense is, you’ll need to set up for each one. This is an essential part of your monthly budget. Let’s dive into how the concept of a sinking fund works. 

Let’s say you have 4 yearly events that you know you’ll want or need to spend extra outside your usual budget. 

  • Yearly Insurance- $600
  • Trip- 2,000
  • Car Tags- $200
  • Christmas- $500

Instead of waiting for these things to pop up “unexpectedly,” you can budget them in each month, like this:

  • Yearly Insurance- $600/12= $50 to save each month 
  • Trip- $2,000/12= $167 to save each month
  • Car Tags- $200/12= $17 to save each month
  • Christmas- $500/12 = $42 to save each month

This money should be set aside to use when you will eventually need it. Put it somewhere you won’t touch it. Some banks let you set up separate “folders” in your account. Using a cash envelope system might be good too. Whatever you do, you can’t look at it as free money, but money you are saving up to make sure that those bills that are irregular don’t throw off your whole month. 

No matter the size of your budget, you’ll always find a use for a sinking fund. You might need to put money aside for a new car, a down payment on a house, even a wedding fund. Rather it’s a yearly event or just an extra expensive event coming up in your future; you can be sure that using a sinking fund will put your mind at ease. 

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