If you’re a homeowner, (or want to be!) you probably know
that along with home ownership come some big expenses, both foreseen and
unforeseen. You can plan for both types
of expenses using one or more sinking funds.
For instance, you know that in five years your roof will
need to be replaced. If you plan to have this professionally done, that can
easily cost $10,000. For most people, that’s a large amount of money. If you
don’t plan ahead, you’ll likely need to take a loan or tap into savings or
retirement funds. But let’s look at the same scenario with a sinking fund. Ok,
so five years out, you start saving for a new roof. You get paid bi-weekly. So
how much would you have to set aside from each paycheck to save $10,000 in 5
years (interest aside)? $10,000/5=$2,000 per year. $2,000/26=$76.92 per
paycheck, or $38.46 per week. If you eat fast food or drink expensive coffee
regularly, you could easily pay for a new roof just by cutting back on those
things.
Another instance where a sinking fund can be useful is to
make up for varying utility costs. You can call your utility company and find
out the average monthly utility cost for your home. Or better yet, find out the
exact amount billed each month over the past twelve months. Divide that number
by twelve and set aside that amount each month. If you can, deposit some extra
money at the beginning of the year. You should accumulate enough extra during
lower than average months to cover your expenses during higher than average
months. If you have a budget (which is
an absolute necessity, in my opinion!) this will help to keep things smooth.
Some other examples where a sinking fund would be useful are
homeowners insurance, car insurance, home remodel, and purchase of a new car.
Really though, sinking funds can be used for just about anything. Whether
they’re for larger purchases, or small
routine expenses, sinking funds can help to temper financial extremes, and give
you some financial peace of mind.
