In today’s post, we are going to discuss some amazing sinking fund categories and ideas that you can include in your budget.
These tips will help you and your family as you plot your financial future compared to relying on credit cards or other debts for big expenses.
However before we discuss this I just wanted to explain some terms.
What Is A Sinking Fund?
A sinking fund is money that you set aside to cover some future major expenses or debt. In the case of an individual or family that could be, vacation expenses, purchase of a car, or even a house.
Ideally, you would keep that money in a separate savings account and use it when the time comes for that purchase or expense.
This is a good way of managing funds than getting a loan that binds you throughout the duration of that loan. Piling on debt is never a good idea in most cases. You just enrich the lending institution with the interest payments.
In the case of companies sinking fund is a fund containing money or savings set aside usually to pay off a bond or debt. This ensures that your income is not severy affected when you make such a big payment in the future.
It, therefore, acts as a cushion when, for example, bonds mature. In the case of a bond, the company pays the face value or purchase price at the end of the period.
In the meantime, the company pays bond interest usually at the end of each year.
If you are interested in learning more about bonds I have a post titled, How Do Bonds Work?
What Is The Difference Between A Sinking Fund and A Reserve?
The difference between a sinking fund and a reserve is that a sinking fund is for a specific thing while a reserve is usually not specific.
Reserve funds help the management of companies prepare for unexpected expenses. Whereas a sinking fund is for a specific thing like saving money every month to pay off a $100 million bond in 10 years’ time.
Amazing Sinking Fund Categories and Ideas In Your Family or Personal Budget
One can create all sorts of sinking fund categories in their budgets. It all depends on your future financial plans and obligations. It is a wonderful way of avoiding debt to settle major expenses.
1. Vacation Sinking Fund Category
I won’t be further from the truth if I say that vacation costs are one of the big-spendings on most people’s budgets. This is especially true of families as they have to pay for at least two people.
You can avoid this by creating a vacation cost sinking fund of some sort. This works especially well if you only go on vacation once a year. In this case, then you will have a whole year of setting money aside for your vacation.
If it is a big family you may fail to reach the whole amount but at least you will have a good cushion for your expenses.
At least you will only have to borrow just the remaining amount and not the whole sum.
2. Automobile Purchase Sinking Fund Category
Because of the ease of getting credit nowadays, most of us prefer to get finance to finance the cost of an automobile. But this is another area where we needlessly spend more money than we ought to through interest payments, etc..
The five years it takes to pay off an automobile loan could be used to raise funds towards that cost. By doing that you will avoid interest and other similar charges that you get charged for buying an automobile through debt finance.
Actually, if you invest wisely the funds that go to your sinking fund you will be surprised at the surplus you will get.
There are so many investment vehicles out there that you can use such as stock, bonds, etc. Or you can just invest all that money in a savings account if you are risk-averse.
Though I would not advise anyone to keep his money in a savings account for too long due to the very low-interest rates on offer nowadays. If the interest rate is below the rate of inflation, the value of your money could actually be going down every year.
Big companies and organizations always set aside some money for emergencies and I would urge that you too should do that. You don’t want an emergency to find you with nothing in the bank.
I am reminded of the COVID-19 epidemic that has led to millions losing their jobs within a short period of time. Something very few if any had anticipated and therefore had not planned for it.
We have therefore had people scrambling on what to do as they had nothing in their savings account. It is amazing how we spend money on going to cinemas and other entertainments and not on setting money aside for emergencies.
This pandemic should be a wake up call for all of us to prepare for emergencies.
4. Automobile Repairs
I have already talked about automobile purchases but now we want to talk about automoblie repairs.
Automobile repairs are as sure as any expense you can think of. There will always be a time when you will need to have your automobile repaired or maintained.
It, therefore, makes sense to set aside some funds for such eventualities. You don’t want to be caught unawares of these types of bills.
I have seen friends scrambling on how to take kids to schools and other errands after a car broke down and they didn’t have money to repair it. You, my friends, need to avoid this by preparing for it and you will be as calm as a cucumber when it happens.
If you can get insurance for that well and good. In that case, you will use this sinking fund category to pay for insurance premiums.
5. House Purchase
This is another area where most people only think of debt, in this case, mortgage and not cash. The financial industry have done a good job of convincing all of us that that is the only way to buy a house.
However, if you were to be disciplined you can actually save and invest enough money to buy a house. You only need to be disciplined about it as you need a couple of years to pull it off.
So if buying a house is for you then you can create a sinking fund for that. Just be prepared to do it for at least 10 years or so. All this depends on what you do with the funds in your sinking fund.
With some wise investment you should be able to raise enough money to buy a house. Think of the people that invested $1,000 dollars during Amazon IPO, their investment is now around a million dollars.
I understand that Amazon is an exception but even with other investments, you should be able to do it.
I believe that one can realistically accumulate all or a major portion of the cost in 10-15 years. This can work even if you take into account inflation.
To be honest I would urge all young people to consider postponing buying a house until they retire. In that way you avoid all the expenses you incur when you own your own house. You avoid all the maintenance etc as you rent a house.
And another good thing about this plan is that you will retire to a brand new house and not a house you have been in for decades.
It has actually disadvantaged countries where most people own rather rent their houses according to some experts. It is time governments in these countries discouraged such practices to improve labor mobility.
In some parts of the western world health care is free and therefore most people don’t have to worry about this. However, even in those places, there are limits set for some drugs.
For example, the government may refuse to fund some expensive cancer treatments. In this case, you will have to fork out your own money to have such treatments.
This has been a real headache in countries such as the United Kingdom where parents are forced to borrow money to finance such expensive treatments.
In places where people rely on private insurance, people are used to settling shortfalls. But you will be surprised that still many people rarely set aside anything for such eventualities.
So this is an important area when you consider setting up a sinking fund category in your budget.
7. Taxes Sinking Fund Category
Taxes are one of those things you cannot seem to avoid. We all have to “render to Caesar the things that are Caesar’s“. That is what all good citizens are called up to do.
This is one area where you can easily prepare for so that you are in good books with the powers that be. Otherwise, you could end losing your property if the worst comes to the worst.
You can run away from some lenders but you have zero chance when it comes to the IRS.
8. Christmas Gifts
Like or not Christmas is coming and we all need to prepare to buy some gifts for friends and family.
It used to be easy a long time ago when people used to get double pay in December. But nowadays we have to find a way to spend more when our income is static.
We can avoid most of the headaches this time by creating a sinking fund to take care of all these expenses. And the good thing about this is that we have the whole year before us.
I would imagine that it should be easy to come up with the amount to set aside as we have at least a good idea of how much we spend on this. In these days of low inflation, we can be certain that there won’t be much change in the cost.
9. Valentine’s Day
If you are in love then you cannot afford to avoid Valentine’s day. Otherwise, you will be in serious problems with your partner or spouse.
Since this is a very big day you need to prepare something special. And something special means that you will spend more money.
And if you plan to spend a lot of money, you need to start preparing for it by setting aside some cash. In that way, you will avoid having to get into debt in the name of love.
The good thing about this is that because you have put some thought and energy into this your partner will appreciate it very much.
And there is nothing that brings a smile on one’s face than seeing a satisfied and happy spouse.
Your partner or spouse is special, show them how special they are by spoiling them on this day.
This is realy an amazing sinking fund category and idea.
Tuition fees can really be a headache for those not eligible for student loans. This headache can be managed by creating a sinking fund category in your budget.
Even in cases where you are eligible for a loan, one can still save towards this and avoid these debts that you will be paying off for some years.
All you need is to know the amount that you need and then start saving towards that.
11. Home Repairs and Maintenance
Setting aside money for repairs and maintenance is something that housing associations do routinely. We too need to learn from that and set aside money for home repairs.
This is really a wise move as these costs can be really high sometimes. One of my landlords had problems when it came to replacing a boiler. He felt that he was not ready for such a big expense.
This would have been different had he been setting aside funds for that. As this is an expected expense.
There are parts of the house that will need to be replaced or repaired at certain periods of its life. And if you are the owner it is your duty to do that.
Related Post: Financial Independence Quotes
I hope you have learned a thing or two about sinking fund ideas for your budget. This is not an exhaustive list as we all have different needs and plans. Feel free to create whatever sinking fund category you feel is necessary for you and your family.