By: Sharon Brooks, Family Trust Financial Counselor
What are sinking funds? Simply put, sinking funds are funds set aside each month for a specific upcoming expense. It may be a one-time expense such as a vacation, or ongoing expenses like home maintenance or auto registration.
How do you determine what to save for and how much to save?
- First, start by creating a budget. List your monthly income and all your expenses. This includes monthly payments, such as a mortgage, auto, cell phone, electricity, etc. Next, list periodic expenses. These include car registration, car maintenance, doctor visit co-pays, pet care, Christmas gifts, etc.
- Once you have determined your expenses, break them down by month.
Your auto loan is $380/month. That is a static monthly expense that won’t change.
However, your auto registration is $240/year. That is a static yearly expense that won’t change. Break that expense down by month.
$240/year divided by 12 months = $20 per month. You can save $20 monthly and have what you need when the bill is due.
This also works for expenses that change, like vacations for example. If you are planning a vacation in 10 months, how much money do you anticipate needing? Be sure to include hotel, airfare, food, gas, shows, souvenirs, activities, etc. Divide that total number by ten and save that amount each month for ten months.
Unexpected things happen, but planning for what you know is upcoming can help alleviate some of the stress associated with finances.
If you’d like me to review your budget with you, please schedule an appointment here.