I recently celebrated a birthday. Our local tax assessor didn’t send me a birthday card, though. He sent me a bill for our car tag renewal. Fortunately, last year I began saving a little bit from each paycheck into a dedicated savings account for this very purpose.
It was nice to move the money from savings to checking and send the tax man a check without affecting our monthly cash flow. A few years ago, I probably would have been cashing a credit card convenience check to raise the cash to pay the bill.
This is the third or fourth annual (or semi-annual) bill we’ve managed to save for using sinking funds. Here’s the strategy we use:
How to Set up a Sinking Fund
1. Open a dedicated savings account at your local bank (or online bank) or credit union.
2. Determine the item(s) for which you wish to save for all year long.
3. Divide the annual expense by the number of paychecks you plan to receive before the next bill is due. For instance, a $500 annual expense would work out to about $20 per paycheck since I am paid 26 times a year.
4. Automate the process by establishing an automatic transfer from your primary checking account to your sinking fund savings account. If your bank doesn’t allow this, contact your payroll office and have the amount siphoned from each paycheck.
This can all be accomplished within a single savings account by adding up the total dollar amount of those once or twice a year expenses and dividing by the number of paychecks you receive.
You can use a ledger, Microsoft Excel, or some other tool to help keep up with the balance and which savings goal it applies to.
Some banks, such as ING Direct, allow you to open multiple savings accounts rather easily and you can even give them a “nickame.” Here, you might have four accounts labeled Property Taxes, Car Tags, Vacation, Insurance Premiums.
The bookkeeping is certainly easier with separate accounts, but some like the idea of just having one additional account. Do what works for you.
Other Uses for “Sinking” Funds
Our “sinking fund” has graduated over the years to represent a sort of first-line emergency fund, in addition to a fund to cover annual expenses. We have a “Car Repair” fund, where I occasionally dip into for those hard-to-plan-for flat tires, dead batteries, early-summer air conditioner servicing jobs, etc.
We’ve also created a “Christmas Shopping” fund to plan for annual Christmas shopping for our family. This helps to smooth out these large, once or twice a year expenses so as to not upset the budget in the month in they occur.
Around Thanksgiving each year, we make out Christmas shopping list, gather up any coupons and deals we can find, and do our Christmas shopping within the budget established by the balance in the Christmas shopping fund.
We usually just put it all on a credit card for simplicity, and because much of the shopping is done online to score better deals (and because I hate crowded stores!). When the credit card bill arrives in December, we pay it off electronically from the Christmas savings account and avoid the debt hang over that often carried well into the New Year in years past.
What used to be a budget buster, like a car repair or home air conditioner servicing, is now just a blip in the budget in the form of an online transfer and a check for payment of services.
For large emergencies, our larger emergency fund is there. However, psychologically, I enjoy being able to handle smaller emergencies without dipping in the fully-funded emergency fund.