The following post is from Melissa Batai
When you do your monthly budget, do you add monthly contributions to sinking funds? You know, those line items where you set aside money even though the bill won’t be due for a few more months?
In our family budget, we have many sinking funds that we contribute to monthly—license plate tabs, car insurance, medical, home maintenance, car repairs, Amazon and Costco yearly subscriptions, HOA dues, kids’ extracurriculars, travel, vet bills, and clothing. However, that’s not the way all people budget. Some people prefer to use alternatives to budgeting sinking funds monthly.
The Pros and Cons of Monthly Sinking Funds
We have a lot of sinking funds, and I’m not going to lie, having them makes the budget a bit cumbersome. However, when those annual or semi-annual bills come due, I’m not scrambling for money. I simply pull the funds out of that category. I like saving little by little for annual or semi-annual expenses so I don’t have to deal with one month that might be extremely tight when the annual bill comes due.
Alternatives to Sinking Funds
If you think putting money in 10 different sinking funds is tedious and too meticulous, there are other alternatives to use.
Keep One Large Sinking Fund
To simplify, some people just set aside a certain amount every month, maybe $200 or $500 in a large, general sinking fund. When their car insurance comes due, they pull from this fund. If they need a car repair, they pull from this fund.
This can be a great way to simplify, but you do run the risk of not having enough money in the sinking fund, especially if several items come due on the same month. You’ll want to look back on your bills from last year to make sure that you adequately fund this type of account. Because the account will grow fairly quickly, you may have a false sense of security and assume you have enough until the bills come due.
Handle the Bills As They Come Due
Many budgeters prefer this approach. When the annual property tax comes due, let’s say in August, they pull the money from their current month’s earnings. That means that August may be a very tight month financially because a large portion of your money is going for one expensive bill.
However, the positive of this approach is that in months when you don’t have any irregular expenses, you will likely have extra money to put in your emergency fund, use to pay down debt, or contribute to your retirement account or your child’s college fund.
There is no right or wrong way to handle irregular expenses. If you don’t like setting aside money for bills that you won’t pay for another five months or longer, there are alternatives to budget sinking funds monthly.
My Question for You
How do you prefer to budget? Do you contribute to multiple sinking funds each month, or do you choose one of the other two options? Why?