As I look over our budget, both from this year and for planning for next year, the most obvious thing to jump out at me is the fact that we don’t budget for annual expenses.
I know, a massive error on my part.
But, at the moment we keep a big enough buffer in our current account to cover these. So, when the home insurance is due, or the car MOT and service, or tax or any other annual expense, the amount in our current account will generally cover it. We also have an emergency fund to dip into should we need it.
So, the idea of planning for these in advance, has not really been on my radar. Is that silly?
I follow quite a lot of American pf bloggers, on various social media accounts. I am loving Instagram lately so follow a few on there. And a lot of them talk often about sinking funds. About how they split their savings up and build these different sinking funds. A lot of them are very honest about their money, their income and their expenses so it is really helpful and insightful.
The way that we have approached Christmas this year has definitely got me thinking about this. Even with the best will in the world, I haven’t been as organised as I would have liked to be. I guess having two young children will do that to you! But, it would have been nice to have had a pot of cash specifically for that purpose. I wrote about a Christmas savings challenge, but probably started it too late for it to have any impact.
In fact, I have been writing our new budget and have put a category in for Sinking Funds for this exact reason. I just need to figure out how much I need to save for the various pots, then work out a plan for how to do that. Yet more plans! I sometimes feel that our money can only stretch so many ways and that I might hit a wall. But I feel even more prepared in some ways, so that we aren’t suddenly spending lots of money. Because there will be a pot for it!
Do you use Sinking Funds? How did you decide on your categories? I’d love to hear from you!
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A year or two after I started work, when I was just starting to get my finances into shape, I recall writing out a list of all those annual expenses (including estimates for unknowns such as car repairs), dividing by 12 and then rounding it up to a “tidy” monthly amount. I then set that amount up to transfer to an instant access savings account each month, and transferred the necessary anounts back to my current account as rhe bills came in. I didn’t even try to treat each category of expenditure as a separate “fund”.
Hi everyone, this year for the first time, I have been splitting our funds into different “electronic” jam jars. Holidays, Sinking fund, long term savings etc. This has worked quite well, something quite nice about being able to dip into the right jar at the correct time, as I have had the tendency in the past to rob Peter to pay Paul, which if I am honest has led to one or two hiccups when it has not quite added up!
Whereas with a set amount I have learnt to make it go around. Early in the New Year, I will sit down and reassess the figures and make a few adjustments, trying to get interest on the jars, means occasionally switching if deals disappear.
I use ynab a electronic budgeting system and I budget every month for Christmas, birthdays car insurance etc even my charity donations so when I have expenses I don’t have to worry about them and it definitely gives me a clearer idea of my budget
I don’t. Like you I have an account that holds enough money to pay off big annual expenses when they come due.
I have a separate account for all bills, I divide the total cost of each bill add it up and transfer it each month, just so there are no surprises, I even have one for the chimney sweep
I think these funds are great for anyone who needs to budget to make it all add up by the end of the year. If however you have sufficient monthly income to cover these annual expenses within the month they are due without getting into debt then I believe they are a poor choice. My reason being interests rates for savers are poor. So let’s assume Christmas costs £1200 (for ease of figures). Rather than put away £100 per month into a poor savings account I would always opt to overpay our mortgage as the saved compound interest effect Notably out weighs any interest made on the savings account. Then in the December just take the £1200 out of normal monthly income. For me this works, each month I get paid anything remaining from the previous wage is entirely paid off the mortgage. So on the month car tax is due less goes off mortgage. The quicker we loose the mortgage the better. Higher interest rates are coming so I want to make the most of every penny being paid in comes off the capital and not the interest
I’ve not heard this described as a “sinking fund” before, but in essence putting aside funds to cover purchases / expenses that occur at a timeframe that is different to when you receive income makes a lot of sense as it smooths the expense across the year.
You might want to also consider doing this for more than just annual expenses – for example car depreciation (assuming you’re not on a PCP / finance deal), or even household repairs.
Consider carefully where you hold the fund, balance risk and reward etc.
I don’t use sinking funds, as it is too much like miscellaneous. I am 54, so I know what expenses are coming and budget for those specific items and a cushion.
I also keep 3 months or more of living expenses for a rainy day. However, the rain is always an injury that keeps my husband from working and we are at the point of easily being able to live on my earnings.
We are contemplating buying a second/retirement home, so that might stretch us a bit…
Ditto. I keep a spreadsheet of all annual and regular expenses including presents and divide by number of pays. My aim is for the grand total to stay same from year to year which forces us to use less (water, power, etc) and/or shop around. Of course it does go up but not drastically.
I have one pot which covers all these expenses. I know my rough annual spend for car maintenance, insurance plus xmas/birthdays so I add this to 3 months of expenses and try not to let my emergency fund dip below that.