• Ryan

What's a Sinking Fund?

Updated: Jun 6, 2019

When it's time to replace an expensive item in the office or at home, how do you pay for it? Some may have the extra margin in their budgets, but the rest of us aren't greatly unaffected by a major expense. A perfect way to counteract an expected financial blow is to start a Sinking Fund.

Not nearly as sad as the name may suggest at first glance (it's actually quite the opposite!)–A Sinking Fund is merely an amount set aside on a routine basis to fund an inevitable expense.

What Are Examples of Sinking Funds?

Some examples of where you might incorporate a sinking fund would be:

• Christmas Gifts

• New Car

• Summer Vacation

• Remodeled Bathrooms

• New Employee Lounge

• Roof Replacement

• Lobby Chairs

• Replace Carpeting or Flooring

All of these examples, which are only a few of many you could have, are ones which you take a hefty expense that you know will eventually need to be paid out... and then break it down into bite-sized pieces in order to distribute the financial load.

Sinking Funds will save you the stress of having to fork out $5000 when you realize your roof is in complete disrepair or $7000 when your car finally goes ka-put!

We all know what it's like to be in the position of shelling out a risky credit card or dipping into the savings account for something we saw as an unexpected emergency. But guess what? If we can learn that it's an expense that will eventually need paid, then it's not unexpected and it won't be an emergency when it comes time to pay out.

Sinking Funds Are Preparation Funds

Sometimes we like to blindfold ourselves to deceive the reality of the oncoming bus. We'd rather get hit now and deal with the consequences rather than look out into the distance, see a bus one mile away coming towards us, and prepare for the arrival of that bus. At that point, we'll be so prepared for the bus that we can just board it rather than get hit.

Prepare to reach your goals by incremental wins.
A runner prepares for her race.

Another way to phrase "Sinking Fund" is a Preparation Fund. By thinking of a Sinking Fund as a way to prepare for something you know will happen, you will feel much more in control of your budget–home or office. Incremental wins help achieve your big goals!

When the business needs a new multi-functional printer–$4000 won't seem like such a burden, because it's had a dedicated Sinking Fund rolling for 4 years now (the number of years the last printer lasted.)

Let's take a look at the effects of a Sinking Fund with a few common example scenarios:

Christmas Gifts–Let's say you normally spend about $700 on all your gifts for charities, family and friends. Divide it by 12 to figure $58.33 to set aside each month. January will feel less stressful knowing the credit card ghosts of Christmas past aren't going to haunt you.

New Car–You may need to eventually replace the car you received from your Great Grandfather in high school. So, instead of racking up mounds of debt, you could calculate how much you'll need for a modern upgrade–we'll say $12,000–then divide it by the number of months it will reasonably take to pay for it.

Tip: Don't forget to factor in any additional lump sums you have to throw at the fund, including the price your old car would sell for.

Office Furniture–You don't really factor in the cost of desks and lobby chairs until you begin to realize the old ones won't last forever, whether in durability or fashionability. And–while an organization's main goal probably isn't to look fashionable–it will begin to feel less pleasant and appealing (and therefore less conducive to productive work) after it has felt it's age. Throw $60 a month into a Sinking Fund for 5 years ($3600 can completely transform your lobby, btw) to stay relevant to the aesthetics of your customers.

Saving for a future purchase.
Divide the item's cost by the monthly amount you can afford to save.

So, the next time your car needs replaced or fixed, there's no need to borrow money from a payday lender. When the time comes to replace your AC unit, you don't have to deplete your emergency fund. And at which point your office chairs fall to pieces, employees won't have to bring their own from home as temporary replacements.

There are tons of ways you can incorporate Sinking Funds within your business or home budget–the important thing is to get started now!

Because we all know the saying about not planning, right? Let's make a positive one.

When we leave a plan for emergencies, emergencies plan to leave.

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