Ahhh, the scent of spring. The weather is getting warmer with
plenty of sunshine while the flowers are blooming and the birds are chirping.
Pesach is now just a sweet memory, right? Or are you faced with unaffordable
credit card bills from all of your Pesach expenses? Did your never-ending
expenses include meat, chicken, wine, shmurah
matzah, disposable goods, snacks, extra cleaning help, clothing, shoes, and
accessories? And don’t forget the afikomen
presents and Chol Hamoed outings. Have you thought about how you will pay for the
credit card bill that you’ve just recently received?
Is this a yearly occurrence, a continuous
cycle you’ve grown accustomed to, where you overspend over a short period of time
and then don’t have enough money to pay your bills? Is there a different way to
cover your Pesach expenses or, for that matter, any predictable recurrent
expense? A sinking fund may be the answer for you.
* * *
What is a sinking fund? A sinking fund is a
planned way to save money for a costly or infrequent – but expected – expense by
setting aside a little bit each month. It is taking a financial goal and
splitting it into bite-sized chunks that are manageable.
This sounds a bit like an emergency fund. What’s
the difference? A sinking fund works as a special-purpose savings account for
something specific. An emergency fund is money set aside for unexpected events
and unanticipated expenses; it’s a safety net for you. Sinking funds are
usually put into a different account than an emergency fund so the money is
totally separate.
A sinking fund is a strategic way to save
every month or every pay period for an expense that is not covered in your
regular budget. It allows you to prepare for various future events ahead of
time. Sinking funds help individuals, couples, and families avoid the pressure
of using a credit card for items that they may not be able to pay for. These
specialized funds can help you manage your monthly budget and avoid
overspending. And perhaps most importantly, sinking funds can help you become
proactive by building healthy money saving habits so that you can set and reach
your financial goals.
Let’s take a moment to discuss the difference
between a goal and a sinking fund. A goal is an outcome that you expect to
reach or accomplish. Saving money in a sinking fund is how you reach your
desired goal. It is the small, manageable, incremental, and routine everyday
actions that you take in your life to reach your desired outcome – your goal.
* * *
What can you save for in your sinking fund? An
upcoming bar mitzvah, Pesach expenses, Chanukah presents, and vacations are all
in the sinking funds category. Sinking funds may also include property taxes,
car insurance payments, yearly condo fees, home renovations, and automobile
payments. They can also be used for smaller expenses, such as gifts.
Sinking funds are usually saved in one of two
ways or a combination of both: 1) cash in envelopes and/or 2) deposits into a savings
account. Smaller expenses that come up more frequently, such as birthday
presents or going out to lunch with friends, would most likely be saved in an envelope.
This gives you the advantage of having easily accessible cash, something that a
savings account cannot offer.
Larger sinking fund categories, such as for a
car, vacation, or property taxes, are probably best saved in a savings account.
Each category should have its own separate, high-yield, no-fee account.
* * *
What are sinking funds envelopes? They are
just envelopes – plain and simple. Each envelope, whether manila or plain,
colored or white, horizontal or vertical, is simply an envelope with the type
of sinking fund noted on it. Many individuals have a bit of fun with their
sinking funds and decorate their envelopes with an identifying image along with
lines indicating how much money is in the envelope.
Having a picture of the goal on the envelope
makes the goal much more concrete, especially if you are a visual learner, and
makes the boring job of saving money more exciting. Make sure to draw lines on
the envelope to record the amount that you have deposited along with the total
amount in the envelope. Make sure that the goal amount is listed as well. You
can color the picture using gel pens, markers, or crayons to make savings a bit
more pleasurable and relaxing. If you are not the type to color on an envelope,
simply write the sinking fund category along with the goal amount. Insert an
index card into your envelope to record the date and amount of money that deposited
in your envelope, along with the total amount that is in the envelope.
* * *
Practically speaking, how do you save for
sinking funds? First and foremost, figure out which sinking fund categories you
would like to set up. Be sensible about what you are saving for and how many
categories you can realistically have at this point in your life. Remember, you
may not be able to afford everything you want.
Next, decide how much money you need to save
to reach your goal for each category. Third calculate how much money you will
need to set aside each pay period or each month to reach your financial goal.
And finally, review your budget to see how much you can spend each month on
your usual expenses without dipping into your emergency funds, general savings
accounts, or charging on a credit card. Saving in your sinking fund means that
you have the money for expenses that you deem necessary.
So, let’s say you want to plan for next year’s
Pesach expenses. You would first add up all the shopping receipts from this
Pesach, or simply total your Pesach expenditures from your current credit card
statement. Divide the total by 12 and set aside that amount each month in your
sinking funds Pesach envelope for next year. It’s an easy and straightforward
way to save.
It is up to you, and only you, to know your
true priorities in life and what incremental steps you will take to reach your
goals, whether financial or personal. Sinking funds may give you the
motivation. Just remember that, in order to be successful, you have to work
within the confines of your budget and your income so that savings expenses do
not become an overwhelming burden. It takes hard work, dedication,
determination, tunnel vision, and motivation. And beyond the actual dollar
amount you accumulate, saving by means of sinking funds gives you the
confidence to reach your goals as you look ahead to the future.
And now for the question you’ve been
wondering about: Why are sinking funds called sinking funds? It
seems almost oxymoronic. Perhaps it comes from the term used in 18th
century England to pay down the national debt. The debt is slowly “sinking” as
it is paid off. Whatever the origin of the term, it’s a good idea!
