We had a $1,000 emergency bill last month. To say that I was not planning on spending $1,000 that day was an understatement. Then we found that our hot water heater had been leaking overnight. It was leaking from the join of the lid and the base and had been for a minimum of 12 hours.
Our 800 sq. ft. basement was approximately half flooded. Since Kayla had to go to work, I spent the morning shutting the water off, cleaning up the water and calling a plumber. All of this while still trying to call into meetings for work. It was an absolutely hectic, anxiety filled day.
BUT, I was prepared, which alleviated all of my concerns about the money. I’d gotten a quote from the plumber and knew that we had at least that much saved in our home maintenance sinking fund. What are sinking funds? They are accounts where you can put smaller amounts of funds on a monthly basis to save for random or less frequent, large expenses. For example. we put $200/month in our “home maintenance” account to ensure that when we needed to replace the hot water heater, we wouldn’t have to go into our emergency fund.
This allowed me to focus on the issue at hand and not have to worry about the cost. Having been in an emergency before and not had the funds, I found this to be a huge relief.
Set Up Sinking Funds
The point of sinking funds is to protect your emergency fund from needing to pay for expenses that can be reasonably expected. Your car will need maintenance at some point. Take a look at what you have spent on car maintenance in the last year and divide that by 12. When your tire blows out, you have some if not all of that money set aside for that.
Many will save their emergency fund and then stop saving, outside of retirement funds. Once that happens, they risk being doomed to a cycle of ransacking and then replenishing that emergency fund over and over. Here are some of the categories that can be used as sinking funds:
- Car Expenses
- Home Maintenance
- Annual Insurance payments
- Kids’ Activities
One of the best companies to open these type of accounts with is Ally. They allow you to split one savings account into various buckets. This allows you to have a visible barrier between savings goals without having to open multiple accounts. Here is what my Ally account consists of:
Take a look at your past expenses and see what categories would help your budget strategy. Of course, if you want some personalized advice for your budget, you can schedule a financial coaching session with me. I’d love to help you use your money as a tool to build the life you deserve.