You’ve heard me talk many times before about the importance of saving for the future. We’ve talked about your most critical savings – your emergency fund. We’ve dealt with saving for retirement and college. We’ve even dealt with general strategies for investing. Today, we’re going to get into the concept of how to save for big expenses without debt.
I’m not talking about big, unexpected expenses. That’s where your emergency fund comes in. I’m talking about things like car tires, a new roof for your home, Christmas, etc. For those types of expenses, you rarely get surprised. You don’t just wake up one morning and say, “Oh my goodness! I never knew my tires would wear out. The set on there now have been fine for the last 7 years!!!” Instead, you recognize (hopefully) that these things wear out over time and need eventual replacement. You shouldn’t be surprised every December that your gift giving is likely to increase over what you gave in November. So how do you save for these approaching-but-not-yet-here expenses? Save for them.
I know that’s not what you wanted to hear – save? Save more? That’s not fun. Well, neither is putting Christmas on your credit card. Having worked in collections, I promise you people are never glad they spent a lot of money on their credit cards for ANYTHING. So let’s talk about the concept of a sinking fund. Simply put, a sinking fund is a designated place to set aside a specific amount of money until you reach a particular goal, or run into the specific need. It could be a designated savings account, or it could be an envelope or a jar or anything else really. This isn’t rocket science, but let’s dig a little deeper.
Going with the example of car tires (since I’m about to need new ones myself), let’s look at a scenario. A reasonable set of tires for my car, once mounted, balanced and an alignment done on the vehicle, will cost me approximately $600. Based on my normal driving habits, I will need these tires in roughly 6 months. I have two options: 1) Ignore the problem and in 6 months panic when it doesn’t… or 2) Set aside $100/month until I have the cash for the tires. Simple, right? That’s all there is to a sinking fund. Since a lot of you like the steps laid out:
- Determine the amount you need for your upcoming expense
- Determine how long you have before you need the amount in hand
- Divide. Then be diligent to save until you have the cash
Let’s look at two other considerations. First: what if the expense comes earlier than expected? Be thankful you had some of the cash saved and use your emergency fund to cover the rest, if it actually is an emergency. FYI: Christmas gifts are not an emergency. Second: what if you’re already in a bind and can’t save any more? This is a tougher question to address, but the answer is simple (although not necessarily easy): increase your income. If you know you’re going to have to spend $600 in 6 months but don’t know where you’ll come up with that money, you’ve got 6 months to work on it. Be on the lookout for ways to earn extra income. Be on the lookout for ways to temporarily cut expenses. Sell a few things cluttering up your house. Take on some extra hours at work. You get the idea.
A sinking fund is just one more of those extremely simple things that, if you do it, will keep you from relying on debt for things you can’t immediately pay for each month.