The “Don’t Go Broke At Christmas” Savings Plan
Unexpected expenses can really derail your financial plans.
But, what about those, major expenses that we can see coming a mile away? How can we better prepare for “1-off” expenses that can completely unbalance a budget?
Answer: Sinking Funds!
What Is A Sinking Fund?
A sinking fund is a chunk of money that you save gradually to cover a specific one-time expense in the future.
The idea of a sinking fund comes from the business world.
How Does A Sinking Fund Work In The Corporate World
Corporations use sinking funds as a way to reduce the risk of defaulting on their loans.
Sometimes, companies need to raise money to fund the growth of their business. In order to do that, they will take out a special type of loan from investors called a “Bond”.
Bonds are a great way to raise money - temporarily.
However, as with all loans, if a company has trouble repaying the debt when it’s due they are in big trouble!
So, bond issuing companies keep a sinking fund set aside to help cover the repayment of the bonds they owe.
😏Smart, right?
What Is The Purpose Of A Sinking Fund
Budgeting can seem impossible sometimes because no two months are truly the same.
Calculating your average monthly expenses is tough when no two months are identical. Especially, when you take into account all of the birthdays, holidays, vacations, car repairs, and other expenses that couldn’t care less about your financial plans.
Take December, for example. The 12th month is a financial nightmare for many.
Failing To Plan Is Planning To Fail
Without a sinking fund set aside, debt can pile up on your quick.
Like… Really, quick.
A 2018 survey by the Retail Council of Canada suggested that the average Canadian spends $675 to put gifts under the tree each year. Additionally, 46% of people surveyed admitted that they did not budget or plan for their holiday shopping in advance.
If that’s not enough proof that we should be trying to get ahead of major expenses, think about this stat.
A 2019 study by CreditCard.com found “Sixty-one percent of those who carry a card balance are willing to add to their deficit” to buy Christmas gifts.
Translation - The majority of people heading into Christmas with an outstanding balance will be paying for their gifts well into the New Year.
In the moment, $50 extra doesn’t seem like much, but when you’re wrapped up in the Christmas spirit you can run up a major tab in a hurry.
This is exactly why we need to use a sinking fund.
How Much Should You Have In A Sinking Fund
Unlike an emergency fund, which is used for unpredictable expenses, a sinking fund is established with a defined purpose from day one.
In other words, each sinking fund should eventually cover 100% of the future expense that it is dedicated to.
How To Budget For Future Expenses
The best way to build your sinking fund is slowly and gradually.
Here are three steps you can take to get started:
Identify an upcoming expense that you want to save for.
Determine how much time you have between now and when that expense will need to be paid.
Divide the total expense by the number of months or weeks until it is due to create savings goals.
Let’s work through an example, so you can see how easy the planning process really is.
How To Buy Your Niece Designer Clothes Without Going Broke
Pretend that you have an awesome niece who you love dearly. Let’s call her Daria.
Daria is about to graduate from high school in 3 months and you, being the cool auntie/uncle you are, decide that you’re going to get her a $900 pair of shoes.
Here’s what the numbers would look like…
Expense: Daria’s Designer Shoes ($900)
Due Date: 3 months (12 weeks)
Weekly Savings Target: $75
Where To Keep My Sinking Fund
There is no hard & fast rule on where you need to keep your sinking fund, but there are a few guidelines to keep in mind.
Keep your sinking fund liquid. By liquid, I just mean somewhere accessible. You never want to be caught in a jam with your money locked away when you actually need it.
Keep your sinking fund safe. It makes no sense to risk any of your dollars in a non-guaranteed investment. Forget about gambling your sinking fund in the stock market.
Personally, I keep my sinking funds in a high-interest savings account with my emergency fund.
If you want to optimize your savings strategy, try looking for a high-interest savings account offered by an online bank.
Online banks tend to offer much higher interest rates on their savings accounts than traditional banks. Big banks have tons of branches with tellers and advisors, property taxes, utility bills, and maintenance expenses to cover. These things make running a traditional bank an expensive business.
On the other hand, online banks have no branches and far less staff to employ, so they are able to pass on the cost savings to us, the customers.
Where I Personally Keep My Sinking Fund
EQ Bank’s Savings Plus Account
If you shop around you will have trouble finding a better place to keep your money, trust me.
EQ Bank offers one of the highest interest rates on a savings account in all of Canada.
The EQ Bank’s Savings Plus Account helps me get more out of my money, with no monthly fees, no minimum balances and free transactions.
I opened my account earlier this year - a personal account and a joint account with my wife.
It was pretty simple. I completed the whole process right on my phone in just a few minutes.
Take Advantage of EQ Bank’s Savings Plus Account Today - I’m an affiliate, so using this link will help support the blog (… and it’s Free to join).
What Is A Sinking Fund Used For?
Here is a list of expenses that have a knack for throwing your budget out of balance. These are examples of things you want to prepare for with a sinking fund.
Travel
Gifts
Parties
Weddings
Car Maintenance
Home Renovations
Back To School Shopping
Furniture & Appliances
Future Loan Payments
Tuition
Charitable Giving
Medical Expenses
Team Sports & Recreation Registration
The Last Word
No one says you shouldn’t buy gifts for your loved ones or take that trip to The Bahamas you’ve always wanted. Life is to be lived and money is meant to be spent.
I am suggesting, though, that there is a better way to plan ahead.
Don’t get caught paying for last year’s vacation 8 months after your tan lines fade away.
