The Need of a Sinking Fund
“Before anything else, Preparation is the key to Success” – Alexander Graham Bell
I often find people facing the situation wherein they know the expense/ spend is coming but they forget to plan in their budget. The major expenses which fall in the list are:
- Annual Vehicle Insurance & vehicle maintenance
- Festival Shopping (Esp. In the period Oct to Dec of the year.. starting from Navratri, Diwali to Christmas)
- Birthday & Occasional Gifts
- Electronic Purchases (Like Mobile, Washing Machines etc)
- Attending Family weddings and parties
- Municipal Taxes
- Short unplanned trips to relatives
- Unplanned Visitors or guests at home
- Minor House repairs & maintenance
- Visits to the Doctor for Dental or Eye Check ups
Emergency fund or Sinking fund
When you feel the squeeze you naturally dip into your Emergency fund, but isn’t the Emergency or Contingency fund for true emergencies? It was not kept aside for the expected expenses you knew would come in a year or so.
Sinking Fund is a savings strategy to prepare you for an upcoming expense or a purchase. It is a specific savings plan with a specific use and specific time line.
How to get started ..
So how to deal with it.. List all those sort of expenses which you spent last year and start a sinking fund.
Estimate a figure which you need to set aside to replace your gadgets or buy new equipments to enhance your lifestyle.
Once you have arrived at a figure of the annual expenses say on gifts, insurance, doctor visits etc you can divide them into monthly savings figure. Say Diwali, is 5 months away and I feel I would require 40k for the festival spend I would keep 8k aside every month for the same or my car insurance is 20k and its due in March I would keep aside 2k every month for it.
The amount can be parked in Liquid/ ultra short term mutual funds.
For purchase of Equipments like Washing Machines or a new Mobile it can be figured out by how old is your equipment and when you would probably replace it.
Once you have a sinking fund in place you can buy when you get the best deals. for example you can buy clothes/gifts for a relative’s wedding when there is a off season sale or buy your washing machine in an online sale.
It is all about being prepared for the expenses which are due so that they don’t ruin your long term finances.
Financially and emotionally the concept has a great impact though it seems pretty simple.