Real estate taxes are due at the end of next month. In a few more months it’s car insurance. Then homeowners insurance after that. And WHAT!? They moved Christmas up to December!? How can I go on vacation this summer without Visa and Mastercard?
Have you ever noticed how some people never seem to miss a beat when these large bills come due while others seem to freak out? These even-keeled folks may be following Dave Ramsey’s The Total Money Makeover building these expenses into their budget through the sinking fund approach.
How a Sinking Fund Works
A sinking fund is actually real estate terminology. For example, let’s say a business knows its building will a need a new roof in ten years. If the estimated cost is $10,000, then the business builds $1000 a year into its annual budget, or $83.33 per month.
Let’s say your homeowners insurance is $950 per year. $950 divided by 12 months is about $80 a month. To break it down further, $950 per pay period would be about $37. Every time you’re paid, move $37 from checking to savings. When the premium is due, move all $950 back into checking to pay the bill. But the $37 needs to be in the monthly budget.
'There is treasure to be desired and oil in the dwelling of the wise; but a foolish man spendeth it up.' Proverbs 21:20 Share on XMy wife and I use the sinking fund approach to “self-escrow” each month for property taxes, home and auto insurance, vacation, and Christmas shopping. More importantly, we list each as a line item on the monthly budget. This prevents us from thinking it’s “ours to spend.” That’s another reason to use a separate deposit account to slide the money over each pay period.
What are your thoughts on the sinking fund approach?
UPDATE: Be sure to give every dollar an assignment at the beginning of the month. I am in the process of transitioning from Excel spreadsheets to the Every Dollar app. I’ll keep everyone posted and create some YouTube screen capture videos once I have the wrinkles ironed out.