Our Sinking Fund Accounts

Some time ago Jeff at Delivery Away Debt wrote about sinking fund accounts describing them as such, “A sinking fund can best be described as a pool of money that is set aside to cover future payments. Think of it as a piggy bank that you put money into and when the time comes you get to smash the little piggy and use the money you’ve been saving.“  I’ve used sinking fund accounts for my entire adult life, but I never knew there was actually a name for such a thing.

Amanda from Frugal Confessions commented to my post Tough Times at the Accountability Household asking if we were prepared for income taxes for my husband’s business and also she complimented us by saying, “You’ve done a great job at setting aside money for your other large expenses–so congrats to you!” Thank you, Amanda for the nice compliment. Your comment got me to thinking about the expenses we do save for, and I thought I would take the time to share with you exactly what we save money for each month and why.

  1. AAA. Our yearly renewal for three drivers and “Plus” coverage is $188.  I save $16 each month so that we can pay for this coverage when it is time to renew.  We live quite a ways out and our vehicles are 13 years old, 15 years old and 17 years old.  They are all reliable, but we have been broken down enough times that we are willing to pay $16 a month for having this service.  The tow radius is 200 miles, and we can have up to four tows for each person covered.  I don’t think we have used more than six in one year.  This service offers me peace of mind in knowing if I am stranded, or if my husband or son is stranded, help is a phone call away.
  2. Estimated Taxes. 2009 was the first year we paid estimated taxes, and I grossly overestimated what I thought we would need to pay.  We were setting aside $230 each month, so we ended up getting almost $3000 back.  I would just as soon not allow the government to keep my money all year long so I modified the amount and we only paid $50 each month. I have done a preliminary calculation of our tax situation and it looks like we will be okay.  We may owe a little bit, but I would rather owe a couple hundred than get several thousand back.
  3. Webhost/domain registration.  $15 a month, $180 for the year.
  4. Tires for my Pathfinder. $22 a month. $400 approximately every 18 months. This is based on a time before our son had his own car, and my vehicle was getting a lot more usage.  I am now the only one driving my vehicle, and I put from 1200 to 1400 miles on each month. This means I may only need tires once every two years.  I will continue to save this amount as the price of tires may increase. We are careful with our tire maintenance so we get the most out of our tires.
  5. Tires for other vehicles. Technically this money should be saved from my husband’s business accounts, but since tires are not a business expense (we take mileage over vehicle maintenance costs) it works best for me to save for it with our personal money. $100 a month, $1200 each year.
  6. Auto emissions and tabs. Every other year we have to pay for our vehicles to have an emissions test.  Every year we pay for tabs.  We could save a few dollars by getting tabs for two years but every year I hesitate because our vehicles are so old, we may not have them two more years. I hope they last two more years, but it seems like a better gamble to pay for one year at a time.  $13 each month. $150 for the year.
  7. Electricity. For years I have paid a set amount to the electricity company each month to build up an extra amount to cover the summer cooling costs.  I decided this year I would set the money aside ourselves, instead of letting the electricity company hold onto our money.  I hope I calculated correctly… we were paying $295 per month year round.  I have been paying the bill and then putting into savings the amount that makes up $320 each month. For example, if the bill was $200, I would set aside $120.  If the bill is $187, I would set aside $133.
  8. My 50th birthday party. Okay, this isn’t an upcoming necessary expense. It is truly a “want” on my part, but I am worth it.  $20 a month for a couple of years. I don’t know that this is going to be enough to throw a birthday party for myself, but it will be a good start. I’m not really planning anything huge, maybe a potluck and I have a friend who has already agreed to let me have my party at her ranch. If things start looking up for us financially I may up this amount, or I may need to lower it for a time.
  9. Auto Insurance: Added March 13: I can’t believe I forgot the most important thing that I save for over the course of six months. Auto insurance! We currently save $105 over six months and the total for insurance is $630.

There are a few other things I realize I should be saving for, for example, I typically end up needing a new prescription every two years when I go in for my eye examination.  That usually runs around $200 for a pair from Costco, and then there is the cost of the examination. So I should be setting aside $12.50 in anticipation of that.  I am stunned that almost two years has passed. My glasses from Costco are in pristine condition, there has been no sign of the finish chipping off as it was with the previous pair.

Usually when I start a new sinking fund, I look to see when the item comes due. Taking the example of new eyeglasses, I got my most current pair in April 2009. Oops!  If I were to start a sinking fund this month, March, and I planned to buy a new pair in April 2011, I would need to set aside 2 equal amounts in order to cover the upcoming purchase. Let’s pretend my new pair is due in April 2012. That would give me 13 months to save up the amount which I would normally set aside in 24 months. Therefore I would need to set aside $20 each month to anticipate a $50 eye examination and buying a pair of prescription eyeglasses for $200.

The amount that we currently save each month for upcoming expenses: $350 $461.

The year before I started this blog, we did not have money set aside for anything, and we had to go into deeper credit card debt when the auto insurance came due, or when we needed tires for our vehicles.

This makes me happy to see that we are making progress like this.

Do you keep sinking funds?  Did you know that’s what they were called?

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14 comments to Our Sinking Fund Accounts

  • Definitely! I do sinking funds for anything that’s more than a few hundred dollars.

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  • Sounds a lot like an emergency fund. What is the difference?

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  • I keep a bunch of funds like this too, but had no idea that’s what they were called.

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  • Well done, Mrs. A. Proper planning prevents ….. well, the other P’s.

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  • We live on an erratic income and I have to set aside money for items I know are coming up- life insurance premiums, possible auto repairs, AAA, etc. I even try and set aside a small portion for pet emergencies (last summer we had a $400 vet bill!) It’s so much better now that we have money in the bank versus charging these emergencies on a credit card. ;)

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  • From my accounting background I’ve always known about sinking funds. Interesting application to personal finance though. It’s kind of like a reverse emergency fund, where you estimate what the “emergency” will be, then start saving for it, so it doesn’t become an emergency.

    Do you have single accounts for each, or do you maintain one account for all and keep a journal for where the money will be allocated???

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  • Nope, didn’t know they had a name. I take out a certain amount each month for vacation and Christmas, but don’t have a separate account for that money. Does that count?

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  • LOL! I had no idea this had an official name. I call it “self-escrowing.” Each month I set aside $325 to cover the property tax, homeowner’s insurance, and auto insurance and another $90 for the annual Medigap insurance bill.

    How could I do without having to short myself to pay those annual bills? Let me count the ways! :-D

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  • I have a few accounts at IngDirect but only one of them is a sinking fund for yearly expenses. The other accounts are for “wants” like travel. You set up a nickname for an account and automatically every so often – weekly, biweekly or whatever you choose – money is transferred into your account(s). Which also, reminds me: IngDirect in the U.S has a program where you can make some money by referring new account holders just like they do in Canada. I think that it could be a good fit for your blog. If you are in Canada you can use my referral ID which is 14056503S1.

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    Mrs. Accountability Reply:

    @Ryan, thanks for the information on ING, I love that they allow us to create as many sub-accounts as we wish. I wish Wells Fargo would let me do that, but they won’t.

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  • threadbndr

    I’ve always had sinking funds, though like Funny About Money, I called them ‘escrow’. Property tax for car and house, tags, maintance and AAA for car, estimated vet bills, clothing allowance, gifts. All in one account, but seperate on my budget spreadsheet.

    The difference between a sinking fund and an emergency fund is that with the sinking fund, you know the expense is coming and about how much it might be. I do have an efund, but it’s for things that I can’t foresee happening. For example – oil change or blown tires – sinking fund, blown transmission – e fund. or Yearly vet visit and shots required for city tags – sinking fund, dog gets ahold of something and can’t stop vomiting – e fund.

    You really do need both kinds of savings. If you are using the efund and drain it for things that are actually just yearly expenses, what will happen if you get hit by a REAL emergency?

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    Mrs. Accountability Reply:

    @threadbndr, good explanation on how this all works. I totally agree!

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  • I have had both for years! Never knew that my sinking fund had a name though!

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  • [...] Out of Debt Again, Mrs. Accountability learns the official term for a type of budgeting she and I both indulge [...]

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