Sinking fund – do you need one?

Oh dear, how many accounts should one have?

I already have an everyday (checking) account, an emergency fund, a travel fund and an investment fund. So, a grand total of four separate bank accounts.

A sinking fund will be the fifth account.

I don’t like to overcomplicate my every day finances. For example, all my utility bills are automated – amounts are direct debited out of my checking account when they fall due.

So, what is a sinking fund?

Technically, a sinking fund is when a company sets aside funds or ‘sink’ funds into an account to pay for upcoming debt repayment or tax etc. I am using this terminology loosely for my own purpose as I am neither a company nor do I have upcoming debt repayment as such.

What I do have is annual bills …

These bills either cannot be paid monthly as in they do not give me that option. Or that monthly payment options cost extra in the long run. Or that I just cannot be bothered to pay monthly where a monthly option does exist.

These bills include my annual professional registration fee, professional association fee, indemnity insurance, health insurance, home and contents insurance (lots of insurances!) and council rates. They do not include monthly telephone or quarterly utility bills.

… and ‘can’t be predicted for’ home maintenance or improvement costs

One of my largest expense in 2018 was the erection of new fences on my property and the resulting gardening work. I admit I had been putting it off for several years until they were literally falling over.

Somehow, in my mind I naively assumed that once my mortgage was paid off, that was the end of my needing to invest in my home. So I was neither mentally prepared for this expense nor had I taken it into consideration.

Plus I took advantage of the state government’s solar rebate scheme to install solar panels on my roof several months after the new fences were done. I had to pay for the system up front and then claim back the rebate (which is about 50% of costs so it was a good deal). At the time of writing, I still have not received the promised rebate.

Shock, horror! I don’t have a budget

I don’t like budgets, never did and never will! Before discovering FIRE (Financial Independence Retire Early or really Earlier, in my case), I always made sure I had enough money to cover my mortgage and bills then spent whatever I like on whatever I like. Pretty simple!

After discovering FIRE, I still don’t have a budget. The difference now is that I want to invest, invest and invest. I obsess with how much to save towards that goal, doing the sums over and over again.

As a result, I invested most of what I had in my checking account into the stock market at the start of my FIRE journey.

What I should have done is set aside three months of expenses as my emergency fund and then invest the balance in the stock market. By the way, that is the collective wisdom of the personal finance world.

But I was in a hurry – you know, turning 47 was the end of the world and time was running out. I was missing out on all the compounding interest blah blah blah.

So, I over committed a little too much in the stock market in my early enthusiasm.

Because I am a ‘buy and hold’ investor, I will not sell my shares just to meet a cash shortfall. They are for my retirement one day. I am depending on the passive income that will be generated from the dividends I will receive – that is the theory, anyhow.

Which leaves me feeling I live paycheck to paycheck thereafter!

I know technically I am not living paycheck to paycheck. I mean no disrespect to people who are struggling to put food on the table and pay their bills.

What caused me stress was not my every day expenses as such but the big annual bills plus home maintenance costs. I forgot to take them into consideration when setting up my automated deductions into my various funds.

So in some months when the large bills arrived, I did not have enough money in my checking account. Which meant I had to raid one of the other funds to pay for them. Just to be clear, I did not go into debt to pay these bills.

Some of my online high interest savings accounts have rules whereby bonus interest is only paid when money is not withdrawn that month. This meant that I missed out on the bonus interest in some months.

To avoid this, I then raided the investment fund instead as that account did not have the bonus interest rules. (It had other rules which were easy to fulfil so no drama there)

Now this stresses me out! I detest seeing balances of various funds decline. But worse still, I now didn’t have money available to buy ETFs (Exchange Traded Funds) or LICs (Listed Investment Companies) as planned. Missing out on all that compounding interest again!

Plus juggling and readjusting automated deductions is a pain in the backside. After all, automating deductions is supposed to be a set and forget tactic.

Enter the sinking fund …

I have been tracking my expenses for the last ten months. I now have a better picture of my expenses including the predictable annual bills.

So I add up all these annual bills plus an extra $3000 for unforeseen home maintenance costs and divide this amount by 52 weeks. And set up automated deduction of  this amount weekly into my new sinking fund account.

Therefore I know I will not experience ‘bill shock’ in this coming year. It will just be a matter of accessing my sinking fund to pay the specific large annual or home maintenance bill when they fall due.

Funds in my checking account will be used for normal living expenses such as grocery, utility bills etc.

And best of all, I will not lose any bonus interest. Plus I will have a more realistic amount to regularly invest in the stock market. Yay!!

Have I missed anything? Do you use sinking funds? What do you use your sinking fund for?

10 Replies to “Sinking fund – do you need one?”

  1. Ugh, this! The sinking fund is so important. We’re not quite at a place where I feel like we can have one (so we pay all the monthly bills, even if it’s slightly more in the long term). But it’s definitely on my “THIS NEEDS TO HAPPEN” list. Especially in terms of our cars. We spent about 5k on car repairs last year… We had an emergency fund, but we had to drain it. twice. and the stress was awful.

  2. I have never heard of the term “sinking fund” but it is something I accidentally started when we bought our vacation/retirement home. We live out of state so we needed a way to withdraw cash without our normally lame bank (I know I know we need to switch) killing us on atm fees. We opened a local account and put some money in it. We were able to rent the house why we were away and so instead of us sinking our funds into that account, the renter is doing it for us as well as helping us pay down the mortgage.

    What I like most about your idea is the looking at the total and dividing it up with weekly automated deductions. That is so simple but so genius. I will start that this coming week after I look at the how the new budget works out. I gave myself a raise this month and now it’s time to invest!

    Thanks for the ideas.

  3. That’s great, Thomas! I like the easy automated way of managing money and then every few months or so, review & adjust as necessary. Well done on the raise 🙂

  4. I use UBank for my savings because the bonus interest is really good. I put all ‘leftover’ funds there, but I have a spreadsheet with different categories in it.
    I have an Emergency fund (with 6 months expenses), Pet, Projects (the equivalent of your sinking fund), car, Christmas, rates, holidays and investing.
    Works a treat. If I need extra money for something, all I have to do is adjust the spreadsheet.

    1. Wow! That is very organised and disciplined. I am too lazy to update spreadsheets, haha! Thank you for sharing your method 🙂

  5. Best of luck with the sinking fund, one thing to watch out for is if the timing of the big bills is early on you might not have enough already built up in there to cover it? Still you’re well on your way to being sorted with it all so great job!

  6. The Body Corporate for strata unit blocks have a sinking fund which all owners must contribute a set amount to each year (in addition to the admin fund which covers annual expenses like insurance) in order to fund future building repairs/maintenance that is the responsibility of the strata (E.g. replacing fences, roofs and gutters, external doors, external lighting, gardens, letterboxes etc). The idea is that everyone who owns the property over its lifetime contributes something to the long term maintenance, so people don’t sell out just before big bills are due and leave new owners covering huge costs.
    So if you own a freestanding house, you are essentially your own body corporate, so long term repairs/ongoing maintenance need to be factored into your costs/budget.
    A separate account with regular contributions is a great way of doing that!

    1. Oh, I didn’t realise that there were different fees for Body Corporate! It makes sense that everyone should contribute. I am very lucky that I don’t have to deal with that for my home 🙂

      The sinking fund gives me peace of mind, knowing I don’t have to raid my emergency or investment fund as often for upcoming expenditure.

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