Seize the Means: Sinking Funds 101

Ever been hit with a massive bill that you weren’t quite prepared for?

Cue, your car going in for a regular three-monthly service - and the mechanic finding out your radiator is on its happy way to getting cracked soon. Then the damn thing ACTUALLY cracking halfway up a hill. Big sigh!

Or an operation or medical procedure, you never even knew you needed.

Or being laid off without an idea of when you can get a new job again. *Evil side-eye at COVID-19* and its negative spill over effects in Solomon Islands, despite us still being COVID-free.

Being blind-sided by a huge bill, or a future without your regular pay-check, is never the makings for a less stressful life - and this is exactly why I thought I’d share my thoughts for managing this.

This is where sinking funds are the magic you did not know you needed in your life - unless of course, you already have them set up.

If you do, you are the realest MVP! I was ‘last-year’ years old, when I realised their importance.

So what are sinking funds?

They’re called different things - I’ve heard ‘savings pots’ for example - but they all basically mean the same thing.

Sinking funds are line items in your budget that you put a little money into every fortnight - or month - depending on how often you get paid. These amounts are savings towards a future expense you are expecting to happen.

A perfect example are birthdays! They come around every year, right? My husband and son are both May babies, so I’ve learnt to set my LIFE up to save towards May.

For this blog, I’ll use my babies’ birthdays as an example.

I’ve certainly learnt the hard way that preparing for it a month or two in advance, doesn’t quite make the cut.

Let’s say I have $2,400 set aside for their birthday - singular, because I’m a miser and although I usually have a separate cake for them on their actual birthdays; I hold their birthday party together on the same day.

This budget will cover the presents, cakes, party knick-knacks, and all the miscellaneous expenses that usually happen on birthdays.

In May (because I want to start saving again, the month after I have just spent on them), I will set up a standing order to my Smile account for $100 every fortnight. This equates roughly to $200 a month, but you will usually end up with more, given some months have three fortnights instead of two.

I promise you, there is nothing more fulfilling than having the month you’ve been saving for roll up, knowing you have the funds you need to have a nice day for your family.

Also, side note: Family time isn’t just about money. I’ll write a separate blog later for my favourite no-spend family time ideas, here in Honiara.

Some brevity…

Aren’t your sinking funds just savings then? Maybe - but also, maybe not. Let me explain.

I differentiate my savings (Fire Extinguisher account) from my sinking funds (Smile account) this way:

• My savings are for my cultural overwhelm expenses. They’re expenses with a unknown amount and do not necessarily have a specific use.

• My sinking funds are for specific things I have a fixed budget for, that I’d like to save towards. I keep mine in my Smile account, with a tracking sheet for each sinking fund item; including how much they consist of the total balance. See here.

So how do you differentiate sinking funds from your savings? Easy.

Savings are for emergencies, like COVID-19 laying you off from your job, or getting into a car accident. They’re basically for the unexpected expenses you never see coming.

Sinking funds, on the other hand, are for known expenses you will expect in the future - like a car service. I use the car example a LOT because nothing kicked my budget’s butt harder than a random car expense that was bigger than what I what I had left to spend every fortnight, AFTER my usual necessary expenses.

So what Sinking Funds should you have?

I spell this out in my next blog! See here.