What does setting up sinking funds have to do with staying out of debt? Let’s begin with what sinking funds actually are.

What are Sinking Funds

You are probably thinking you just got done setting up an emergency account so you are all good. Except sinking funds are not an emergency. Sinking funds are to cover those expenses that you know are coming up but they are not consistent. For example, vehicle registration once a year, trash bill every three months, property tax, etc.

The problem is that even though we know these bills are coming up they often don’t make it into our budget. When these bills arive we can try to figure out how to pay them or alot of times they end up on a credit card. This cycle will keep us in debt.

Determining Sinking Fund Amounts

Take a moment to make a list of all the expenses you have that may not be included in your budget. Here are some examples to get you thinking.

• Car Insurance (Some people only pay once every 6 months)
• Annual Fees
• Membership Fees /Subscriptions (gyms, credit cards, anti virus)
• Vehicle Registration
• Property Tax
• Trash
• HOA
• Auto Expenses (oil change, new tires, maintenance)
• Birthdays
• Christmas

Wheter you include birthdays and Christmas is up to you. Check out my post about having a Debt Free Christmas that is a similar concept.

For each expense write the total price you will need for each. Some of these are a set amount and you will know. For other items, such as vehicle registration go off of the amount you have paid in the past or try to get a good idea of the amount you will need.

Take each expense and divide that amount by the number of months you have until the bill is due. For example, lets look at vehicle registration. Let’s say it is currently January and you will need to renew your registration by October. Estimating that your registration is $300 and you have 10 months until you need the money. That is $30 a month.

Repeat this process for each expense. It is important to do each expense separately because you will have different lengths of time that you will need to come up with the money. Once you have the amount for each item per month add them up together. So if vehicle registration was $30, trash was $20, and insurance was $50 you will need $100 a month to go into your sinking fund account.

Setting up Sinking Funds

You will want your sinking funds to be somewhere that you can access easily, however not mixed in with your everyday money. I have a seperate checking account that I put these funds in that way I can pay these bills directly from this account.

You can choose an online checking account that offers a higher interest rate than your bank. This way your sinking fund is earning extra money while waiting to be used. Some good options are Ally, CIT, and Capital One 360, at the moment. Always do your research and pick the bank you think is the best fit for you.

Only use this account for the expenses you have designated it for. You can always add to it if there is a new expense that comes up. However, make sure you add the monthly amount you will need. Don’t get tempted to use this money because it is there.

Are You Ready?

Do you have a sinking fund already? What tips or tricks do you find helpful? Is this your first time setting one up? I promise it will be a game changer!