Sinking funds were talked about in the first FPU lesson, but I didn't really pay attention. It didn't seem to apply to me. It seems I was wrong.
A sinking fund is where you set aside money every week/month/year for large upcoming expenses. Example: You are getitng married in 8 months, the reception budget is $4000, so you need to put aside $500 a month for the 8 months. Otherwise, you'll have to dig up $4000 at the deadline, and you know it's coming.
Dave mentions sinking funds for things like: putting a new roof on, replacing your car, buying furniture. I am not planning on doing any of those things, and I was overwhelmed with the other 2 types of money he talks about at the beginning of FPU: cash for envelopes and emergency fund savings.
Well I do have things that I need to put money aside for. that I have already moved to putting aside for monthly, and it has been a giant stress relief. Things like:
• getting my hair cut and colored (quarterly)
• renewing my license plates (every Dec)
• buying my city sticker (every July)
• Christmas gift fund
...and some others. Other examples might include car insurance (I pay mine monthly), home insurance, taxes, tuition bills.
But mine needs are more modest. I started out just trying to calculate how much money I needed to save monthly for these various items and adding that to the amount for the general category. For example, I have a "Car" category which is really an "All Transportation" category. It includes gas, tolls, parking, taxis, el fares, car repairs, plates, city stickers, etc.
I can't really do the practice where you just put the money you need for the month into the envelope and spend until the envelope is empty. My envelope might have an additional $100 or more in it I am keeping aside for an upcoming Car expense, right? This is where I was messing up.
Last week, I was listening to the Dave Ramsey Show (not sure of the date) and someone called in with a question along those lines. He was getting messed up because he was putting money in his envelopes that he could not spend monthly. And you are supposed to be on a zero-based budget, so then how does he remember what money has to stay in the envelopes, and what money he can spend?
Dave quickly said, You're doing it wrong. That money goes into a sinking fund. My ears perked up. Then he said, I'm going to send you a copy of my book... and went to commercial.
many blogs written by people who use ING Direct as their sinking fund bank of choice. At ING you open up one main savings account that is linked to a checking account -- theirs or at another bank. From that main account you can set up as many as 25 sub accounts and call them anything you wish. Then you can disperse savings from your main savings into the sub-accounts.
So I opened an account with them right away. I am still waiting for my own checking account to be validated so i can transfer some money into ING and set up my sinking accounts.
Here are some accounts I am setting up:
• Hair and Makeup (to separate from general personal expenses like toothpaste and soap)
• Car Plates
• City Sticker
• Car Repairs
• Trip to see Dave Ramsey Live
• Christmas Fund
I'm going to see how this works for me, keeping in mind that I try things, I tweak them to fit me, and sometimes I stop doing them. There are some poluses and minuses I can see right now:
I can rely on the amount that is in the envelopes to be what I can actually spend.
I don't have to carry around a lot of excess cash.
I don't have to keep a running total in my head of what I can spend and what needs to be put aside.
I can see how well I am doing with building up that cash for when I need it.
When the time comes to pay for something that would take quite a hit out of my monthly budget (like my dentists appointments these past couple of months), I will have the money and can stay on-budget.
ING is an online bank. They do have an ING Cafe in my city, and in the downtown area (I work downtown) but it is still a few miles from me.
It takes them a couple of days to transfer the money back into my checking account.
Then what? I have to withdraw it? From an ATM?.
This has many more steps than just having the cash on hand.
I LIKE having a lot of cash on hand. It's addicting.
There was always the chance to fudge just a little bit if I wanted to, because I always had money on me.
Right now I am anxious to get started, and I can't. Payday was Thursday, and that is my first paycheck for February's expenses. I have added several new categories to my monthly budget and highlighted them orange, to indicate sinking funds. This has pushed my printed budget to 2 pages. I am still waiting for ING to validate my checking account so I can transfer the money out.
Hopeful that the sinking funds help me tighten up my cash flow even more.
Photo 1: Gloss Ceramic Piggy Banks. From: "Sinking Funds." If I Were A Wealthy Girl Weblog. LINK
Photo 2: ING Direct. From: "ING announced 1.33 billions USD profit for the first quarter." Financial-Report.Info LINK