What is a Sinking Fund and Why Do I need One?

A sinking fund is a fund that includes all the once a year expenses that we sometimes forget to include in our monthly budget.

Quick, make a list of all the things that you forget to include in your budget throughout the year.

Here are a few examples

Car Registration

Car Insurance if you pay it once/year-(you save money if you do)

Birthdays

Mother's day presents

Father's day presents

Christmas Presents

Valentine's Gifts

Occupational Registration Renewals

House Insurance if you pay it once/year

Life Insurance if you pay it once/year to save money

Extra curriculum sports deposits

Anniversary gifts

Now add up the cost of all of these items and what is your total?

Next take that number and divide by 12 months

Now that is the monthly amount that you should set aside each month to pay for these expenses as they come up during the year!

It prevents us from having a financial crisis!

I don't know about you, but for me, my nursing license renewal costs $700 every August and since I started having a sinking fund, paying $700 once a year has become a non-issue because I already have the money in my sinking fund bank account waiting to be spent for that specific purpose and dollar amount.

I don't include my vacation or holiday goal money in these funds because usually my sinking fund includes more necessity type of expenses, rather than goals.

In my opinion, my vacation is more of a goal that I save up for separately.

Now, some people might say that saving up for their insurance once a year seems too difficult to plan for, but if it saves you $50 for car insurance, $50 for life insurance and $50 for vehicle insurance per year that's an extra $150 hundred dollars to spend towards your vacation, hooray! That's the cost of a fun activity for my family!

So we get peace of mind, plus extra money!

What??!

Awesome!

In a jar in the kitchen?

In our chequing account?

Under our mattress?

in a Tax Free Savings Account (TFSA)

I like the option of keeping it in a TFSA, if you still have contribution room. However, there are also Savings Accounts and High Interest Savings accounts available with your local bank or with an online bank. Check out, more details about Savings accounts and High Interest Savings accounts.

I like to keep my sinking account in a separate place so that I'm not tempted to use the cash for last minute splurges or impulse purchases.

Now Go and Be Intentional in setting up your Sinking Fund!