Sinking Funds - What Are They?

I have been using sinking funds before I even knew they were a thing!

I remember explaining the idea to my mom when I was just out of university, moving in to my first place, and trying to organize all of my monthly expenses.

My mom's reaction was "who taught you how to do this?" Truthfully... sinking funds just made sense to me and I knew that they would make my life easier financially!

So What Are Sinking Funds?

Sinking funds are a fund or account in which you set money aside each month in order to assist you in paying for items in the future.

These items or accounts could be:

• down payment for your first home

• yearly bills (car insurance, property tax, insurance, etc.)

• future car repairs

• vet bills

• school clothes

• home repairs

You name it! Whatever you don't want to get caught off guard by when the time comes to pay for these items... set up an account for! Keep in mind that sinking funds are different than an emergency fund. Sinking funds are for items you know you are going to have to pay for eventually. You KNOW you are going to have to pay your property tax bill or get new tires for you vehicle - set up a sinking fund. An emergency fund is truly for something unseen or unexpected. You can check out my other blog post on emergency funds for more information!

Setting Up the Accounts

Go down to your financial institution and open up the different accounts as savings accounts. You can see some of my accounts in the photo!

(You may be able to do this part online, my financial institution just doesn't have that option.)

Don't just open up any basic savings account though. Make sure the accounts are:

• easily accessible - but not too easy Remember, these accounts are for the future... You want your money to stay in them as long as possible... but you still want to be able to have access to them when you need. The account I chose gives me one free debit transaction each month, meaning I can take my money out once a month without paying a fee. After the one debit I have to pay $1.25 per debit transaction. For me this was PERFECT! Best of both worlds! There is incentive to keep my money in the account, to avoid the fee, and I can tap in to it once a month when I need to!
  

• giving you a high interest rate Since some of your accounts are yearly accounts, the money will be sitting in these accounts for an extended period of time. Make sure you are collecting interest! This works out great for things like yearly car insurance, property tax, appliance upgrades, etc! You avoid paying interest to your insurance company through a monthly program... and you get to collect the interest. WIN WIN!

How Much Should You Put In?

Now that your accounts are all set up, the key is to put money in them! :) This is where your budget comes in! (If you need help setting up a budget you can check out my budget blog or set up a conference call with me!) You will need to know how much money to put in to your accounts each pay period, or month.

For yearly bills - on a semi-monthly pay cycle (there are 24 pay periods in a year)

For example, lets say that your yearly car insurance is $2000. You would take $2000 / 24 = $83.34 (always round up) This means that each pay period you will need to put away $83.34 in to your car insurance account. (I round up further for good measure... and in case rates go up... so I would put away $85)

For yearly bills - on a bi-weekly pay cycle (there are 26 pay periods in a year)

Still the same $2000 car insurance.

You would take $2000 / 26 = $76.93 This means that each pay period you would put away $77 (or $80) in to your car insurance account.

For items like vet bills or school clothes, you will need to have a rough idea of how much you will be spending throughout the year. It might be helpful to look through last years spending habits to see what you have spent in the past. Or... start fresh and set a new budget goal!

(NOTE: If you need help with this stage just schedule a coaching session - I would be more than happy to help you organize your budget!)

For miscellaneous purchases - on a semi-monthly pay cycle For example, let's say that you determined you average yearly vet bills to be $900 You would take $900 / 24 = $37.50 So you would put away $37.50 each paycheque into your vet account

For miscellaneous purchases - on a bi-weekly pay cycle Still $900 for vet bills You would take $900 / 26 = $34.62 So you would put away $34.62 or more each paycheque into your vet account

Automate It!

Now that you know how much money to put in to your accounts each month... you're going to want to physically put that money in your accounts! I know that may seem like common sense... but if it were easy we'd all have money just lying around waiting to be put in to savings at the end of the month! But we know what happens... we see it... we spend it! The key is to AUTOMATE IT! Set up automatic transfers each pay period so that the money automatically leaves your chequings account and heads in to your designated sinking fund savings account! It helps to set up the automatic transfers the day after your pay period... just in case!

Watch It Grow!

Now you just watch the money in the account grow each month while collecting interest! Just make sure that you DO NOT TOUCH IT - unless you need it for the exact reason you created the account for in the first place! And there you have it! A sure fire way to not be blindsided by your bills and re-occurring expenses.

Can you feel the pressure being lifted off your shoulders? I sure hope so!