Advanced Budgeting: Part 3 Sinking Funds

This is blog post 3 of 3 on sinking funds. Please read parts 1 and 2 so this post will have more clarity.

One challenge my clients have with implementing a sinking fund strategy into their budgeting for non-monthly expenses is managing the cash flow it generates. Let me explain what I’m talking about and then give you a plan to be successful in implementation.

Let’s refresh your memory of these two budget illustrations. The first one is our actual expense pattern: when the non-monthly expenses are due and how much they cost.

This second one is our budgeting strategy, starting in January, that we discussed in blog post 2 to get us to a more stable monthly budget.

As we proceed, we need both views to calculate our cash flow. We need to know how much we are setting aside (budget) for future use and how much actual expenditure will go out. Using the same example, we create the following cash flow.

You see, after January we will have $221, then after February we will have $255, and so on.

Here is the challenge: This money has been allocated and budgeted for a future expense. If you spend it, you have completely failed at your goal.

So, how are you not going to spend it? What’s your plan?

Failure to have a plan of not spending it is planning for a disaster and for you to fall right back into your vicious cycle of monthly highs and lows, which we are trying to move away from.

If you lack the discipline right now to keep the money in your primary account, or if you feel it will be too tempting, then I suggest the following strategy until you gain the discipline and long-term strength to leave it in your primary account. You know that leaving the money in your primary account is the simplest option, but you must be disciplined enough to not spend this allocated cash.

To build the discipline you need in the long term, in the short term, do the following:

1. Create a separate account for your budgeted non-monthly expenses.

2. Once you've established an account, transfer the budgeted funds to it monthly.

3. Either pay these expenses directly from the new account or transfer the money back into your primary account prior to the non-monthly expense being paid.

The idea of this strategy is for your brain to visualize that this money has a purpose, and it will be required and needed at a future date, so do not spend it.

You might find that this strategy works well for you and that you never change it. You might even add other non-monthly costs to the list and keep track of them using this account. Most people, however, experience a lifestyle change after doing this for a while, where they live on a budget and cease spending the money left in their account. This discipline will allow you to return to a single account and achieve your budget utopia: a smooth, balanced, and controlled month-to-month system.

Happy Budgeting!

I hope you enjoyed this series on sinking funds within your budget system for non-monthly expenses. If you need any help along the way, you know you can contact me. I’m here to help.