Friday, January 10, 2020

Financially Planning for 2020 with Sinking Funds

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In Tuesday's post I mentioned an upcoming post all about financially planning for the year ahead, mainly by using sinking funds.  Well today is that post!  We'll talk about what sinking funds actually are and how you would use them in your yearly budget, what the most common ones are, and of course, which ones I use and how much I put into them each month and year.

What are Sinking Funds?

Simply put, a sinking fund is a way to save money every month for a larger purchase you know is coming up.  It's planning ahead and making a large purchase easier on yourself instead of treating something like an emergency or surprise.  Like Christmas for example - it comes every year in December, so it is neither surprise nor emergency.  And yet the number of Americans with credit card bills they can't pay off every January is staggering.  Instead of being in that boat, you would make use of a Christmas sinking fund, where you spend all of 2020 saving a small amount each month so that you're financially prepared for Christmas.

You would do the same for all big purchases that would be too big a hit on your monthly budget to have to pay the full amount in cash when it comes due.  You never want to go into debt for things, especially credit card debt.  So sinking funds aren't just for holidays either - you would also utilize them for semi-annual bills like insurance and car maintenance, as well large bills you know will come eventually even if you aren't sure when, like needing a new roof or a huge vet bill.

To determine how much each fund should be, take the total amount you plan to spend on that upcoming cost and divide it by the number of months between now and when you'll need to pay.  Need $1200 for Christmas?  That's $100 a month between now and then.  You can also divide by number of paychecks if you want to set aside money each paycheck rather than each month.  Move this money to another account if it's too tempting to have in your main checking or savings accounts.  Many banks allow you to have multiple small accounts that you can label after each sinking fund if you wanted to.  Whatever it takes for you to not spend it.  Future you will thank you.

Common Sinking Funds

I know what you're about to say - give me a list of fund ideas.  I hear you!  These are just some of the most common, but there's really no end to the amount of sinking funds you could keep.  Personally, I would try to simplify it and not have every single thing on the list (too much to track), but don't leave anything off either and then get surprised when that 6 month insurance bill hits.
  • Car Maintenance - oil changes, car wash, wiper fluid
  • Annual Renewals and Registrations - car tags, Prime membership, Costco, any bills paid semi-annually like car insurance
  • New Car Fund - so you don't have to finance it
  • Back to School - school supplies, new clothes, teacher gifts
  • Home Maintenance - I think it's calculated at at least 1% of the value of your home, per year. So a $350,000 home = $3,500 in a home maintenance sinking fund, each year.  New roofs may last 20 years, but they're still $10,000 when they're needing to be replaced!
  • Utilities - some home utilities aren't billed monthly.  In Chicago, water, sewer, and trash are billed every two months and are higher in the summer.
  • Pet Care - vet visits, food, monthly medications
  • Holidays - decor, food, and clothing for Christmas, Easter, 4th of July
  • Gifts - Christmas gifts, birthdays, Easter baskets, anniversaries
  • Donations - some include this monthly, but a lot of people like to make larger donations in December instead
  • Vacation - airfare, gas, event tickets, extra food
  • Medical - co-pays, deductible, over the counter medication
  • Clothing and Shoes - it's better to save up and buy quality rather than waste money on fast fashion every month.

My 2020 Sinking Funds

Since everyone's financial commitments throughout the year look different, everyone's sinking funds will look different too.  But I know you might be curious to see what I have and how much I put in each one.  Here's what I anticipate needing money for this year:

Gifts - $300 per year.  This seems low, I know, especially considering that I'm counting all gifting occasions and not just Christmas.  But I have a plan for the year for strategically using gift cards and swagbucks so that I can keep spending in this area low.

Pet Care - $1,000 per year.  Her groomings come out of this fund, which cost $70 every 6 to 8 weeks.  It also covers her annual vet visit and any shots she might need then, plus food, treats, and potty pads.  Were she to have a larger, emergency vet bill, I already have a fully funded emergency fund for that.  More on emergency funds next month.

Gardener - $600 per year.  It's generally around this, though decreasing each year as she puts in plants that don't need much tending and re-bloom each year.  I really dislike yard work, so money well spent in this house.

Personal Care - $400 per year.  This includes clothing and shoes, toiletries, makeup, nails (though I don't do nails much anymore) and hair.  Which is why the number is high - it costs almost $350 just to get my hair done twice a year.  Woof.  
Parties and Travel - $200 per year.  We are planning a trip to Disney World in April, but I saved for that specifically in 2019.  So it's not reflected in this year's budget.  The only house party spending I'm planning on doing is for Halloween.  I have no idea if I can stick to this, but I want to try!

Things I note in my budget but that I don't necessarily create these 'sinking funds' for - 401(k) contributions and Roth IRA contributions. I know they need to be at $19,000 and $6,000 respectively by the end of the year, but I just let those come out of each paycheck.

Do you set up sinking funds in your budget? What big expenses are you planning for this year?  If you have any questions, let me know in the comments.

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