I love sinking funds. Well, if I’m completely honest, I love the idea of them more than the practice, but I’m planning on getting mine organised and automated. Sinking funds can make or break your budget, especially if you tend to have a more relaxed approach to your budget. If you automate them, they’re a great way to keep your arse covered without having to worry too much about it.
Back to basics…
What is a sinking fund?
A sinking fund is basically a savings account that’s there to fund a specific bill. They’re used to cover costs that occur less often but will still almost definitely need covering. The best example is Christmas. Year on year we complain about how expensive Christmas is, how much January is a struggle due to extravagance at Christmas, yada yada yada.
Christmas happens every year. Not only does it happen every year, but it happens on the exact same date every year. Also, we need to cover the same costs every year: presents, food/drink, decorations, having to take time off work to go to kid’s school plays, Christmas party clothes.. the list is endless. And pricey.
A sinking fund is a savings account you’d pay into that you’d use to pay for Christmas. Tot up how much money you need, divide it by 12/52/however often you get paid and that’s how much you need to set aside. You get it? By the time December rolls around, you’ll already have the money saved up and won’t need to panic about it. Christmas will be a much more relaxed affair.
I suppose technically a pension is a sinking fund for retirement.
What else can I use a sinking fund for?
Here’s the thing: I feel like I could use a few…
- Car repairs – they’re inevitable. Also consider car insurance, MOT and, if you can bear to think about it, a new car fund. Man, cars can be a pain.
- Holidays – if you have the funds available, specifically set aside for that purpose, you can take advantage of great deals and flash sales.
- Clothes/makeup – again, if you have money in your account specifically for these items, you can take advantage of deals and, for example, buy a dress if a surprise party crops up. Sometimes companies like Space NK and Cult Beauty do ‘spend £75, get a free gift basket worth £150’ type deals – it’s a great way for beauty junkies to try new stuff without feeling guilty. I sue these opportunities to stock up on stuff I already use – £75 could buy a year’s supply of cleanser or concealer or whatever you use.
- Home repairs – you never know when the boiler’s going to break and you’ll need to foot a big bill that isn’t covered by your insurance. Some companies have a service where you pay monthly and they’ll fix your boiler, but you’re betting that your boiler will break; they’re betting it won’t. Take away the risk by paying yourself the money instead. Obviously, use your own judgement with this – if you have a dodgy boiler you may be better off paying the gas company. If you’re renting, but thinking about buying, start saving now. It may seem extreme, but these things NEVER seem worth saving for, and then your boiler breaks and you wish you’d prepared better. Such as life.
- Birthdays – yours, your partner’s, your kid’s…you’ll resent them less if you’ve got the cash for a pressie and a day out 😉
- Something you want to save up for. Anything. You know, a trip to Ikea, an ASOS haul, whatever.
Organising your sinking funds
Ok, I have a couple of ideas, but if any of you currently have a great system for organising your sinking funds, let me know in comments if you’d be so kind.
Currently, I don’t have an organised sinking fund as such. Since we’re saving for a deposit on a house, we just have a couple of savings accounts that are going towards the deposit – we’ve just had to pay out of it to replace our car. Sure, it’s a knocked out a big portion, but we got a lovely car (that we paid cash for) for a great price and it was something we needed. Our previous vehicle failed her MOT SPECTACULARLY (she’s outlived mechanics’ estimations for years -it was her time) and Dave needs a car to get to work.
There are two ways of doing sinking funds that I’m considering:
1 – Digital – opening a load of savings accounts linked to my current account. Automatically pay money into each one every payday. Hmm, not sure it’d be that easy to keep track of. I’m not sure why but i don’t like the idea of having that many bank accounts. I don’t know why, it’s just a feeling.
2 – An envelope system. Get yourself a safe and a load of envelopes. Write on each one what the money is for and put cash in them. Again, I’m not sure I’d like keeping much cash in the house.
I may need to sit down and work out a paper system of separating my money, whilst keeping it all in my ISA. So, the money would technically be in one lump, but you’d update your notebook every time you were paid so that you’d know how much money was for the car, how much for the deposit and so on. Maybe a spreadsheet would be the best way to do this – that way you could adjust the amounts in each fund as necessary – for example of your car cost £50 more than you had saved, you could take £20 from your beauty fund, £20 from Christmas and £10 from birthdays. Hmm, I’ll have to get on that. I appreciate a good spreadsheet.
I hope that was helpful/wasn’t just me rambling on about something I’ve only half explored myself. Writing this post has certainly inspired me to get more of a handle on my sinking funds.
Let me know below if you have any thoughts on this subject – I’m a newbie to it myself so I’d appreciate any tips!
Also, I’m going down to posting once a week rather than twice. I thought my new job would come with a reduction in my working hours (35 a week – hell yasss) but we’ve had someone leave and a lot of illness. I find it hard to turn down hours – especially in a new job where I can use all the practice I can get.