Advanced Budgeting: Part 2 Sinking Funds
This post is a continuation of Part 1, so you might want to read it here.
So, when we left off, we were talking about how to get to utopia, or a more consistent month-over-month way of budgeting that gives you consistency versus the challenge of budgeting where you have high expense months and low expense months.
For the sake of convenience, I’m going to assume we are starting our transition to a better way of budgeting at the start of a new year, in January. Note that this same transition process can work in any month, but you do have to understand your income (limits) and your cash flow flexibility. If your income is significantly higher than your expenses, transitions can be almost instantaneous. However, most people are living paycheck to paycheck, so they must be a bit more creative.
Let’s look at the instantaneous method briefly. Let’s assume that our monthly take home income is greater than $1,200. Thus, transitioning to a more consistent method and using sinking funds to budget for non-monthly expenses is key. It would look something like this:
You will notice a few things: we have some larger non-monthly expenses near the beginning of the year; our anniversary is in May; Valentine’s Day is in February. Thus, we must quickly fill those sinking funds first until the month of those events, then they get lowered to the annual monthly budget amount to get us closer to the $877 utopia month budget amount. You see, when the income isn’t our problem, we can reach our utopia amount around the middle of the year.
Let’s assume our net income is $1,000. As a result, in this simple example, we are living paycheck to paycheck, which is not uncommon with my clients because their numbers are proportionally the same. At this amount, those past high expense months (May and December), talked about in the last post, would kill our budget. We don’t want to go into any debt, nor sacrifice our goals, and we don’t have the extra cash flow to transition quickly, but we want to get to our utopia budget flatline and stay within our limit of $1,000.
To transition, we must be slightly more creative and prioritize the non-monthly expenses that come due first. To stay within budget, we will need to delay filling up the sinking fund for events later in the year, like Christmas.
See here how we creatively started to transition to the sinking fund method of budgeting, prioritizing the funds near the beginning of the year and then delaying and catching up on the funds for later in the year, slowly reaching our utopia budget amount by the end of the year going into the next year.
Here is a visual chart of budgeting life, month-to-month with no sinking funds (blue) and budgeting life with sinking funds (grey). Which do you think is more peaceful and easier to manage and deal with the unexpected?
Using sinking funds for non-monthly expenses is truly the utopian world of budgeting, and if you need help transitioning from your current budget or if you are just starting budgeting, we can help. Connect with us for a free consultation today, if needed.
Stay tuned. There is one more part to this blog post series, and that is how to leave your funds alone.