The sinking fund account would be designed solely for the purpose of meeting once off expenses that occur throughout the year
When asked by a reader last August, how many accounts they should have, I recommended four.
They were a current, monthly bills, regular savings and an emergency fund account. I also said it’s okay to have any number of accounts as long as each served a purpose.
With that in mind, if I was to reply to that same reader eight months on I would add another account to the mix, and it would be called your Sinking Fund Account.
This would be an account designed solely for the purpose of meeting once off expenses that occur throughout the year.
It’s different to an emergency fund, where you are setting money aside for the unknown; with these particular outgoings, you know they’re coming.
Things like your annual car insurance, property tax, Christmas, summer holidays, four new tyres for your car.
There could be any number of reasons, but they consistently appear at more or less the same time every year.
If you don’t plan for them, they usually have to be funded by monthly income, raiding your savings account, sometimes your emergency fund, or a combination of all three, or worst of all you have to take on debt to pay for them.
People tell me all the time, things are going along fine for them, there is money left over at the end of every month and then bang!
The house insurance renewal premium comes in, their monthly cashflow is thrown out of whack, and all their good work comes to an end.
And just when they begin to get things back on track again, bang! Another bill or renewal arrives and money has to be found somewhere to pay for it.
Expenses that happen once a year, have an uncanny way of going undetected on your financial radar.
But, once-off annual expenses can be the scourge of budgeting and one of the main reasons people fail to get their spending under control each month.
Very often, it isn’t the amount they are spending each month that’s causing them trouble, it’s the expenditure that raises its head at the same time every year, which is their Achilles Heel.
The good news is that it all can be avoided. And the sinking fund account is the answer.
Well, it’s part of the answer, it’s really only the name of the account you need to open.
What you have to figure out is how much you need to be setting aside each month, to fund the total cost of those expected outgoings you will incur in the year ahead.
You can discover this very easily. Get out a piece of paper and write three lines of equal distance down the page. In between the first line, your heading is ‘Month’, the second line’s heading is ‘Expense’ and the third is ‘Cost’.
Think about what once-off expenses that will require a lump sum payment from you. If you are unsure, take out your bank statements or go back over them online and look at what large payments went out of your current account or savings account at a particular point in time.
Once you have totted up everything, you now have a number you need to build into your monthly budget and set aside for these eventualities.
And don’t stop at just last year’s expenses. Think about what costs you might incur this year because of a change in your circumstances and add them in as well.
The number you arrive at might be €1,200 which means you need to be setting aside €100 every month into your sinking fund account.
And if you have an expense that isn’t 12 months away, count the number of weeks between now and until it’s due and divide the cost by the weeks left and that’s the amount you need to be saving.
Your goal should be to save enough into your sinking account to cover the cost of these annual expenses you know are going to happen every year.
And if that’s too much, that’s okay, set aside what you can and the remaining monies can be found from income or savings or from a loan if needs be, but it will be a smaller loan had you done nothing.
Having another account does mean a little more effort with setting it up (a very basic savings account where you have immediate access to funds is fine – don’t worry about the interest rate, it’s not important) but it will make things easier for you in the long term.
A sinking fund account is an easy way to accommodate large purchases that we often overlook but know are coming.
Instead of being surprised by them, be prepared for them, and if you do, your core monthly budget or existing savings won’t be affected, and it will lesson your chances of having to take on debt.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie