As I was standing in the checkout line at Costco this morning, I overheard the cashier behind me telling a lady that her annual membership fee was due, and that she was simply going to add it to the total. I was honestly surprised when the lady, who was wearing designer jeans and looked pretty well off, told the cashier that she didn't have enough to pay for the renewal fee.
I don't intend to judge. I know the economy is not doing so well and people are struggling. And we've been in a similar position (although, instead of being honest and saying I couldn't afford both, I just put it on the credit card like it wasn't a problem). However, I started doing something last year that has totally changed the way I handle our family's finances.
It's called the "sinking fund."
A sinking fund is essentially a pool of money that continues to grow until some or all of it is needed. Every year I know there are certain bills that I need to pay. These include Costco membership, car registration, school tuition, insurance premiums, etc. I also know my car is going to need regular maintenance and we're going to need to visit the doctor and dentist. And since I know we're not going to get an extra paycheck when these bills are due, I've started planning for the expenses with the paychecks we currently receive.
It's a simple concept, really. To start, I divide each annual bill by 12 - this tells me what needs to be put aside each month in order to have the full amount ready when needed. For our Costco membership, it's $9. For our car registration, it's $17. Once I've figured out each category, I total all the amounts up ($9+$17+...) and transfer the lump sum into my savings account. Why transfer it into my savings account? Because in my head this money has been "spent" so I don't want to see it hanging around in my checking account. I use a budgeting program to keep track of how much money accumulates in each category (but even a notebook can do that), and when the time comes to pay each specific bill, I transfer it back into my checking account and pay it off.
For the expenses that aren't annual, such as doctors and car repairs, the account just continually builds (or sinks) and we just pull from it as expenses come up. For instance, when we had to complete the five physicals (one per family member) for our adoption, it was nice to have the money ready to go rather than not be prepared.
I know budgeting gets complicated and frustrating, but I feel like implementing just this one small change has made the biggest difference in our ability to be financially prepared.
Anyone else do this? Thoughts?
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4 comments:
We switched banks this week, and we opened a second Savings acct- called "Sinking Funds". It is separate from the emergency funds savings acct. :)
That is really smart! We just keep an extra amount in savings on top of our emergency fund for this sort of thing, but I like your idea of bein so exact so you never come up short!
How did you set aside for the dr and car repairs or figure out how much to set aside?
Quite honestly, there is no rhyme or reason to how we set those up. I think I started putting $25-$50 in both, and when our income recently went up, so did those funds. Our car is still under a pretty good warranty, so our biggest concern is covering oil changes and regular maintenance. When the car becomes irreparable, hopefully that fund will double as a car replacement fund. We're hoping that's a long way off. The goal for our medical fund is to build it up to at least cover our family's annual deductible. It's slow going, but every bit counts!
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