We all have expected, yet non-immediate expenses that seem to creep up and rob our emergency fund, and financial peace. When following the seven baby steps to financial stability, funding a sinking fund is recommended while simultaneously working on steps four through seven. Creating this fund will add another layer of financial security to cover known yet usually unplanned expenses.
Sinking Fund
money set aside to cover expected, yet not immediate needs; can also be used for unforeseen needs (like a garage door repair!)
A sinking fund will cover expenses like appliance repair and replacement, car replacement, major house repairs, furniture, carpet etc. Our material possessions wear out – we know that, but rarely are plans made for their replacement. As a good steward of all possessions, good care is given to our possessions, yet we also need to plan on replacement – a good refrigerator will not last forever; although I do own one that is probably 40+ years old – not efficient, but works!
Determining a sinking fund is the easy part; planning how to fund it is more difficult. Here are four basic steps for projecting monthly saving needs:
- Tour your home and make a list of items that someday will need to be replaced. To get you started, here is what is included in our list:
- Washer and dryer
- Water heater
- Furnace
- Stove
- Refrigerator
- Roof
- Outside house paint
- Mattresses
- Large furniture items
- Television
- Determine the cost (in today’s dollars) to replace each item on your list.
- Estimate the average “life’ of each item. An easy internet search will provide the average life span of most appliances, home repairs, etc.
- Create a monthly savings goal for each item following this example:
To replace the refrigerator every 15 years is about $1200.
$1200 ÷ 15 years = $80/year; $80 ÷ 12 months = $6.66 / month
To account for inflation, round up – save $10.00/month for refrigerator replacement
- Follow #4 for every item on your list from #1.
- Add savings goal amounts from #4. This total needs to be saved every month for the fund to be fully financed.
If the total in #6 is more than your current budget can handle, determine what can be saved. Saving some is better than nothing. Remember, the purpose is adding a layer of protection over your emergency fund – like insurance.
IF your emergency fund is in place, begin saving for this fund – set up a separate checking account, have the money deferred each and every month. Before you know it – you will have a nice little nest egg for paying cash for replacement of major appliances and more – and you sometimes can get a better deal if paying with cold, hard-earned cash.
This is one more blanket of security set for yourself – what a wonderful feeling to have money in the bank when needed. This will prevent dipping into the emergency fund, and provide peace of mind.
When will you begin? What questions do you have? Call or email me, I am happy to answer your questions.
For the love of family,
Kristin
