Last week I wrote about our sinking funds and how we manage bills that come due throughout the year. One of my readers Jenna commented saying, “Sounds a lot like an emergency fund. What is the difference?”
It is true that our sinking funds could be used as an emergency fund. The problem comes when one of the bills comes due, and the emergency has wiped out the account. At that point we would have no other choice but to charge that bill to a credit card and go deeper into credit card debt.
Funny About Money said, “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.” Typically when a person has a mortgage they have an escrow account. The amount of your mortgage payment might be $500 but once you add in 1/12th of the yearly amount (1 month’s worth) of taxes and insurance (both typically required held in an escrow account by the bank who holds your mortgage loan) your payment may be $800. The bank holds this extra $300 a month until the taxes and insurance comes due, then they make a payment.
If your home is paid for, like Funny About Money’s, you don’t have an escrow company withholding your taxes and insurance money. So unless you have a few hundred or thousand dollars lying around when those bills come due, you need to save back one month’s worth each month all year long so you have the money on hand to pay when due.
Kevin from Out of Your Rut asked, “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?”
I do both. I keep an Excel spreadsheet which keeps the amounts tallied, and I also have several different ING Direct sub-accounts. Typically I move the money from our checking at Wells Fargo to the savings at Wells Fargo. I tend to leave the majority of these sinking funds in the Wells Fargo savings, except for my birthday fund and the electricity fund. Once a month I move money over to the ING Direct sub-accounts for those two accounts.
Here is a screenshot of the spreadsheet; you will probably need to click on this image to see it clearly:
If you look at the insurance you will see that I started this sinking fund five months before it came due (instead of six), so I made a double payment of $210 into the account in April. That caught up the account so that the amount needed in August was present.
At the bottom shows the running total of what should be in the account at any given time. In April 2010, $420 was in the account, in May with the addition of $321 the total rose to $741. In June we added another $321 and the amount rose to $1062. However, in June we paid the IRS an estimated payment of $150 and Mr. A had to pay a prorated rate for two tires that had separated. This reduced the account to $612, and so on.
To the far right, you see there are grand totals for each sinking fund. This is how I know the amount of money being saved for each account.
At the left, the items are listed, and some show a month due, some show a length of time the money is being saved, the total being saved and the monthly amount being set aside.
If we did have an emergency, we could definitely take money from our sinking fund account. But I prefer to keep this money protected as these bills are forthcoming. We have a small emergency fund of about $700. I would like for it to be several thousand instead of several hundred, but we are working to pay off our credit card debt.
Sometimes I’ve saved a certain amount for an upcoming bill and it turns out to be less than I’d anticipated. When that happens I do not consider that amount a windfall. I move the extra amount into our emergency fund. Unfortunately since we have been having a money crunch anything like this is going directly toward our current budget. For example, when Mr. A was able to get the tires replaced I ended up having to take $500 and put it toward our monthly budget since we have not been taking a draw from his company until he has more work coming in. Ordinarily I would have moved that money into the emergency fund and built that up. It doesn’t seem to work that way for us, and I try to just be thankful there is money available when needed. It just seems like every time we get ahead a little bit, something happens to push us back. I am grateful that we have thus far not had to go any deeper into credit card debt!
Thank you for the comments to my original post which inspired me to delve into this subject a bit more.