From home improvement projects to car maintenance to insurance premiums to birthday gifts, we set aside a bit of money every month so we can afford to pay cash for our annual or semi-annual expenses.
Before we did our whole “get out of debt thing“, our hardest time of the year was January. That’s because in January, we got our annual car insurance bill, which was around 4,500 NIS. If I recall correctly, the maximum number of payments I could make on this bill was five – or 900 NIS per month.
On a budget that was already over-extended, an extra 900 NIS per month was impossible. So we put more stuff on the credit cards those months in order to “afford” the insurance premiums – further exacerbating our cycle of debt and money mismanagement.
Just as we were “recovering’, September would hit – which meant increased food expenditures for the chagim, coupled with our home owners insurance policy coming due.
We just couldn’t figure out how to get ahead.
Enter Sink Funds.
Once we paid off all our debt (by living way below our means, taking on extra jobs and cashing in a savings account), it was time to start working on our emergency fund. We maintained our gazelle intensity, despite some road bumps.
During this phase of our “money makeover”, we began to implement sink funds.
The idea is to set aside (AKA sink) a fixed amount of money every month into a separate account to preemptively cover annual or semi-annual bills. The ‘separate’ account is essential for us, because otherwise we would be too likely to “accidently” spend the money on other expenses.
For insurance, the monthly amount was easy enough to calculate: We took our annual car insurance bill and divided it by 12. Now when the insurance bill comes in the mail, I simply transfer one-sixth (our bill comes twice a year) of the fund into my checking account and write a check. We do the same for life insurance, home owners insurance and our disability policies (we’re self-employed, so all that is “on us”.)
For family gifts, we set a reasonable amount that we can tolerate within our budget – for us, that’s $25 per month. For some, the right amount might be $5 per month while others might be able to afford $50 or even $100 per month. There is no right or wrong answer, as long as it make sense in your budget (remember this is PERSONAL finance – so please, let’s not judge one another.) We move $25 each month into a separate savings account and then when birthdays or other gift-giving occasions come around, we pay our bills by moving the designated amount back into our checking account. Of course, we stretch our $25 as far as possible with all of my savvy shopping strategies!
For home repairs & improvement, I once read that you should assume that your annual cost of repairs will be 1-2% of the value of your home. In the last two years of home ownership, we’ve found that to be about right. When we need to fix the dish washer or weather proof the windows, the labor and parts all get funded out of the home sink account. Again, we shop around and get multiple bids anytime we need to get work done – so that we’re still stretching our hard-saved dollars as much as possible.
For car repairs, maintenance & replacement, we again set aside a fixed amount into a separate savings account. To figure out how much to save, we roughly calculated the annual cost of car repairs and maintenance, from oil changes to new tires to the big maintenance checks (at 1050,000 miles, 127,000 miles, etc.) We divided that amount by 12 and then buffered it a bit to cover unplanned repairs. Then we add in a bit more – when our income to expenses ratio allows – to cover the cost of a new van in 4-5 years. We bought our new-to-us van (2004) two years ago. We figure it will last us at least another four to five years (200,000 miles or more). Which means that in five years – give or take – we’ll need roughly $10K to buy a new-to-us vehicle. Since car loans aren’t an option, we’re saving now.
As you can see, we follow the same process for every sink fund we create. These funds have allowed us tremendous peace of mind.
On a very modest income, we are continually surprised by how much more money we feel like we have with sink funds. They allow us to cover expected expenses – like insurance premiums – and to cope with unexpected-but-predictable expenses – like home or car repairs.
If something catastrophic should happen, G-d forbid, we always have our emergency fund to fall back on as well. But for the everyday stuff, these sink funds have turned emergencies into inconveniences.
Stay tuned later this week for more information on the tachlis of where and how we set up our sink funds.