For years, my husband and I lived paycheck to paycheck. Then life happened, and we started living credit card bill to credit card bill.
The way we climbed our way out of that cycle is a long story, but if I had to pick the one turning point, I’d say it was finally making and living on a budget.
When you don’t make much money, living on a budget is tough. After all, we figured our needs would always be far greater than our income. But our perspective on that totally changed once we learned two magic words: Sink funds.
Why January Was the Downfall of Our Financial Year
Before we did our whole “get out of debt thing“, our most stressful financial time of the year was January.
That’s because in January, we got our annual car insurance bill. The bill was around $1500 and if I recall correctly, the maximum number of payments I could make on this bill was five – or $300 per month from January thru May.
On a budget that was already over-extended, an extra $300 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 – with its increased food expenditures for the holidays. More credit card bills.
We just couldn’t figure out how to get ahead. Our inability to handle those big annual expenses made “paycheck to paycheck” look like a pipe dream.
How Sink Funds Helped us Break the Paycheck to Paycheck Cycle
Once we paid off all our debt, it was time to start working on saving up an emergency fund.
Now, an emergency fund is an incredible way to create a financial buffer between you and the mess that life sometimes hands us. But we weren’t content to just have money set aside for the worst case scenario.
We wanted to have money set aside for the regular case scenarios, too. The ones we knew were coming but weren’t able to cash-flow.
So we began to implement the idea of sink funds.
A sink fund is where you set aside (i.e. “sink”) a fixed amount of money every month to preemptively cover annual or semi-annual bills.
(For those who have asked, we keep our sink funds in our Capital One 360 savings account. It’s a great way to keep the money just out of arm’s reach, so we don’t accidentally spend the money on something else.)
Just what kinds of things do we “sink”? Here’s a look at four of them:
Car Insurance Sink Fund
We take our annual car insurance bill and divided it by 12. Now when the insurance bill comes in the mail, I simply transfer one-half (our bill now comes twice a year) of the fund into our 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”.)
If our rates go up, we might be a few dollars short in our sink fund. That’s easy enough to cash flow, and we adjust our monthly payment into the fund going forward.
Family Gifts Sink Fund
We set aside a reasonable amount every month to cover birthday and Chanukah gifts for our immediate family. Years ago, we settled on $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.)
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 savings as far as possible by getting awesome deals.
We set up this system 6 years ago, when we were aggressively saving up our emergency fund and finances were much tighter. At this point in our financial lives, we could cash-flow birthday gifts, but I have come to really like the discipline of saving a little bit each month — and then knowing that the amount we can spend on gifts is limited by what’s in that account.
Home Repairs Sink Fund
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 few years of home ownership, we’ve found that to be about right.
Each month we save 1.5% of our home’s value, divided by 12. When we need to fix the dishwasher 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.
(By the way, this amount is not going to be sufficient to cover major home improvement projects. If one of those is looming on the horizon for you, you’ll need to save more aggressively.)
Car Repairs, Maintenance & Replacement Sink Fund
To figure out how much to save to this sink fund, 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 to help cover the cost of a new (to us) vehicle in 4-5 years.
In 2010, we bought our new-to-us 2004 Honda Odyssey van. With regular maintenance, we’re hoping it lasts us until about 200,000 miles. But since car loans aren’t an option for us, we’re saving for it now.
This is just four of our sink funds; in total, we have 14 — all of which you can read about HERE.
Each one of these funds has brought us tremendous peace of mind. On a modest income, we have been amazed by how much more money we feel like we have when it’s bill-paying time, thanks to these sink funds.
If something truly emergent should happen, G-d forbid, we always have our emergency fund to fall back. But for the expected expenses – like insurance premiums – and for the as-of-yet-undefined-but-still-predict-able expenses – like home or car repairs — we now have the money to cope rather than turning to credit cards.
Are you looking for advice on how to turn your family’s paycheck-to-paycheck situation around? Personal budget coaching might be right for you.
Learn more about how to work with me personally to solve the stickiest parts of your personal finances and start winning through strategies like using sink funds.
Do you use sink funds to save for your annual expenses? What method do you use to pay for both expected and unexpected events?
(A version of this post originally appeared in 2011. Since sink funds still rock our world, I’ve updated this post with current information and am sharing with you again. If you find this helpful, you might want to Pin It for future reference!)
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I have to say, this part of your blog is the part that interests me most. (Totally not interested in the deal parts, I’ll be honest.)
We sorta have a sink fund… only it isn’t divided into different categories. Its more- this is how much we can spare from our regular expenses every month to go into our savings, and these savings end up being our hills and valleys account (variable income and all that), our emergency fund, and also for the “sink fund” of stuff like gas balloons, bulk buys, etc… Do you have separate accounts for each of those funds, or is it all in the same place, just keeping in mind that x dollars out of the total amount is in the car repair fund, y dollars is for gift giving, z dollars is for insurance, etc?
We started doing this too when we got our budget in order. We use http://www.mvelopes.com (changed my life) to keep things separated out within specific accounts but we still have 3 separate joint checking accounts. Mine which is just for groceries and my spending money. His which is just for monthly bills. CheckSave (we call it) is like a holding account for all this sink money. So when I look at the banks website it just looks like one lump sum, but in mvelopes I can see what it’s all allocated for. We save here for holidays, birthdays, anniversary, gift giving to others, car tags and school bus. Ideally we’d be saving more towards the next car and vacations, but right now that comes out of bonus money and extra income. Saving this sink money monthly has really taken A LOT of the stress out of our finances for me. I could never go back.
You hit the nail on the head (as always) with the “taking the stress out of finances”.
BTW, you’d be proud – I cleared out a ton of stuff in the basement last night and called Big Brothers, Big Sisters for a pick-up. They’re coming on the 29th. I’m not even going to try to sell it on CL. I just want it gone!
A little tear in my eye I’m so proud. 🙂
Love this concept. How do you have so many different bank accounts with out the fees? I have a few open right now for various funds but it seems that our bank maxes us out at a certain point.
Thanks!
Look into moving your money into a bank that charges lower fees, or try credit unions. My credit union doesn’t charge annual or maintenance fees and members can have as many accounts or shares as they need. There is a one time joining fee, ours is $5 that holds the account open. That Monet is never lost, you’ll take it with you when you decide to close the account. Credit unions are different than banks because they are not- for- profit businesses and are governed by the N.CUA. They are governed by a board of directors that are voted on by shareholders ( that’s all account holders!!) And they return the profits to the members through lower loan rates and lower fees. Credit unions are awesome!!
What if you don’t have money to put in sink funds? We live paycheck to paycheck because we don’t have anything extra, the total amount I’m able to save a month is 100 dollars. We don’t use credit cards, we are frugal with all of our expenses and we barely make it each month. Any suggestions?
I would do three things in your situation:
1. I would go over my budget with a fine-tooth comb. There are almost always areas to cut, even when it seems like there aren’t. I would also look closely at expenses that we are paying for monthly, which could be “sink funded”. Our insurance company, for example, allows you to pay monthly. But if you do, it works out to be about $4/month more expensive than if you pay biannually. We save that $48/year by doing a sink fund. I’d also pay attention to the “big categories” and have a longer-term discussion with my husband about whether those expenses are in line with our income and values.
2. I would evaluate which areas are most “vulnerable” in my budget and start working on sinking funds for those first. If you often find that medical bills, for example, cause you to go into the red, start there. If car repairs or home repairs are your Achilles heal, start there.
3. I would figure out how to get some extra cash flow into my household. Without knowing the specifics of your full financial picture, I’d probably start small, looking for items I could sell on Craigslist — and apply those to my funds. I’d look at ways to increase my income with side jobs or even part time jobs. And I’d look at ways, longer term, to increase my family’s earning potential – whether thru career changes, promotions, etc.
Thanks very much for the great tips!
Let me know if you have more questions! I know how hard it is to be in that situation. While “earning more income” is the easiest (and ultimately best) answer, there are ways to change things on the expenses side, too! Hopefully starting some sink funds (among other things) will give you a bit of breathing room!
How is the best way to work your way out Of debt when you don’t have money for saving or paying more than the minimum on credit card bills due to high rates/fees?
What a great piece 🙂
It was a real turning point for me too – I could never figure out, despite several graduate degrees, how to not get thrown by irregular expenses [whether ‘known’ like car insurance or ‘surprise’ like car repairs].
I didn’t want to think hard about it I guess till I got tired of the debt stress
I read something that clearly explained it: write down all those irregular expenses, guess at the surprises, and divide it by your paychecks – then put that much aside and don’t touch it for anything not on the list!
Because really it’s there because you’re paying those bills a little at a time, ahead of time.
I used to have a very complex zero based budget – now I just have a google spreadsheet where I have 20-25 line items, one of which is labeled ‘freedom’ and accounts for at least 1/3 of our monthly after tax income!
In a separate cluster on the spreadsheet is my ‘freedom’ calculator – has all our insurance, property taxes, car repairs, medical expenses [maxed yearly at our maximum out of pocket under our insurance] and also really variable and optional things like vacation budget, clothing, gifts and party expenses. The spreadsheet is set up to divide it by 12 and make it the budget line item – and I can keep track of the monthly expenditures each month on the side.
I have only two bank accounts for our regular expenditures – one checking and one money market mutual fund which holds that freedom money. My accounts are set up to transfer half the freedom amount over to the money market with each biweekly paycheck – and when I pay one of those giant bills I just make a transfer for that amount back to checking and note the spending in the budget – so nice to know the money is THERE when I need it!
Cherie – I’m so glad I’m not the only one who found this seemingly straight-forward issue so confounding for so long. I really relate to what you said at the beginning of your comment, too. I often say this when I talk about money with people – it’s not about book smarts. It’s about never having been explicitly taught this, coupled with the emotional baggage that we all seem to bring to money.
Do you have a bank where you can label these different accounts online? I seem to remember you posting about one once, but I can’t remember which it was. I have various accounts with my bank and I keep getting confused which is for what – I’d love to find a bank that would let me label my accounts.
YES! I use Capitol One, Yocheved — and I love being able to have them all under one umbrella, but separated out. I know most people could probably do with fewer accounts, but I really like having my money separated into purpose. It keeps me honest 😉 I explain how we set up our “subaccounts” in this post, Yocheved, if you want a more hands-on tutorial. http://kosheronabudget.com/budgeting-basics-how-where-we-save-our-sink-funds/
Ah, I just felt a wave of clarity reading this. Looking forward to discussing this with the husband tonight.
Great post. Thanks!
Best compliment ever! I’m so happy – let me know if you have follow-up questions! 🙂
I have so many sink funds, 14 in total, such as Birthdays, but also one for the month December (I live in the Netherlands and we celebrate Sinterklaas in December), Medical expenses, House, Car, College children, Life happens, Loss of income. Of course I could put everything together in one bankaccount, but this works way better for me. Glad to know I’m not the only one 🙂
I love sink funds! We have 13 total funds in one savings account which I keep track of on a very colorful spread sheet. We add small amounts to our car repairs, clothing, gifts, and homeschool/kids activities funds every week. It adds up quick!
I’m trying to follow a budget & I do this for all our yearly bills, gifts for birthday & Xmas but also for monthly & 3 monthly bills. I averaged our monthly & 3 monthly bills & put enough away to cover them, it’s nice to know that when the bill comes in the money is there already. I don’t put it into a seperate account as our savings account offsets our mortgage but I write it all down each month as though each thing is a seperate little account & I add or subtract accordingly, it doesn’t take long to do.
The part of our budget that I find difficult is where the month should start & end, so if anyone can help I’d appreciate it. We pay everything on our credit card & pay the total each month, this is so the most amount of money stays in our savings account offsetting our mortgage for as long as possible. All incoming & wages go into the savings account. The question is should our month go from mortgage payment to mortgage payment or credit card payment to credit card payment or should it be from the beginning of the month to the end. I can’t quite work out the best way to do it. Please help ?
Hi Gayle! Sounds like you guys are making a ton of progress!
I’d suggest starting the month on the 1st of every month (real time) and then I’d pay your credit card bill within the month that the charges were incurred. You don’t have to wait until the due date to pay it. Sometimes, I even pay my credit card bill weekly – so the budget lines up right and I’m in total sync.
Does that make sense?
Thank you for replying, I can see that would keep all my ducks in a row but the reason we use our credit card to pay for everything & then pay it all off by the due date is so we are using the banks money & more of our money is staying in the savings account to lower the interest on our mortgage until it absolutely has to come out. It confuses me & the budget, I have been putting the credit card payment into the month the payment is due even though it’s really the previous months costs. I guess I can put it into the budget as though it’s outgoing & the money is in the account till the due date?
Yes, that’s what I’d do!