Don't Sink Your Financial Ship

Sarah Ritchie |

I’ve been a Dave Ramsey follower for years.  I have not always fully been on the Dave train; I hate to admit it.  One thing that I’ve always struggled with was the idea of a sinking fund.  I know what a sinking fund is but have had difficulty putting them in my budget.  It’s almost like a mental block. But I will admit, I’m not a natural saver.  I can spend money with the best of them.  It wasn’t until recently that I began seeing the benefits of sinking funds.  Considering my budget is locked in before the beginning of each month, it’s a little odd that I haven’t fully embraced them all along.

What is a sinking fund?  Well, it’s a fund you put money into each month to save for an upcoming expense.  For example, a new car, a car repair, vet visits, home repairs, taxes, vacations, school expenses, etc.  Any expense that may come up during the year that you need to save for would qualify.  The bottom line is that you don’t want to be hit with an unexpected expense that you can’t pay for and either have to cash flow it or charge on a credit card.  Obviously, we want to avoid credit cards at all costs unless you plan on paying it off right away and even then, it’s not a good habit. 

Thankfully, we’ve always been able to cover these unexpected expenses by moving things around in our budget but that’s not ideal.  So, last year we decided to create sinking funds over and above our emergency fund.  I cannot tell you how happy I am that we did.  It’s almost like the universe was foreshadowing because shortly after, we were hit with a ton of vet bills and a hefty tax bill.    

How many sinking funds should I have?  Personally, we only have one sinking fund that we put money into.  I know some people who open multiple savings accounts and place money in each one every month.  For me, that sounds like a management nightmare.  You have to figure out what works best for you.  Whatever you decide to do, make sure that the money is liquid and can be obtained quickly.  This isn’t money you want to lock into a CD for months at a time. 

How much should I put in my sinking fund(s) each month?  It depends on what you’re saving for.  If you’re saving to replace a car, then that amount will depend on the budget you’ve set for a new car and how much time you have to save.  If it’s for car repairs, I’d add up what repairs you think your car will need and divide it by the months you have until that repair comes up.  You can also start a general car repair fund and set a savings goal based on what you think certain repairs may cost.  This same process applies to most expenses.  If you are paying property taxes or homeowner’s insurance from your sinking fund, then divide the total by 12 and save that each month.    

I save for unexpected vet bills but obviously those vary.  I have been lucky to have enough to cover any expenses that have come up but if it’s a $10k surgery that your pet needs, that may be a little harder.  That’s an excellent reason why you need to be debt free with a fully funded emergency fund.  Your emergency fund of 3-6 months of expenses is for things like that.  It’s a little trickier if you’re still in Baby Step 2 and paying off debt though.  That makes sinking funds that much more important. 

Bottom line, an unexpected expense that you are not prepared for can sink your financial ship and really hinder your progress.  It’s very stressful wondering how you’re going to pay for something.  It makes you want to give up, especially if you’re digging yourself out of a lot of debt.  You’ll feel a sense of relief knowing that you have the money set aside to cover anything that may come up.