A few weeks ago our car died. It simply wouldn’t start, and after an inspection it was determined the cost to repair it would be far more than the value of the vehicle itself. Luckily, my in-laws were on vacation so we were able to borrow their car for a few days while we shopped around for a new one.
Since we knew the car was not in a good way, we had resolved months ago that a sinking fund for a new vehicle had to be a priority in our budget. We needed to save every month, and it had to be a higher priority than some of the other items we had previously been saving for.
The day the car died did not cause any panic. There was no scrambling, no desperate thought of how we were going to afford a new car, and most certainly no thought of financing or taking out a loan. We knew in advance this was going to be something we needed and we made it a priority among our other spending to ensure when the time came we were prepared and capable of purchasing a new vehicle with cash.
We knew how much we had to work with - which also gave us some bargaining power as we started car shopping. When you walk into a dealership with cash, and that is all that you have, there is only so much you can pay. Therefore, when it came to the price of the car we wanted, we explained we would be paying in cash, and that this was all the money we had available to buy the car with. We found a good vehicle priced close to what we had saved and we were able to negotiate the price.
Now this is the funny part. When we mentioned paying cash, the sales person reiterated they offered financing for used vehicles as well. When we once again stated we would be paying cash, the remark was, ”Oh, you mean you’re going to get a loan from the bank and pay us cash, then just repay the loan to the bank.” Once again we clarified that no, we would just be paying cash for the car. Real money. It was received with a blank stare. A completely confused look as if we had just told them we would both be turning back into pumpkins at the strike of midnight. It seemed to be so completely foreign that a customer would or could actually just buy a car with cash.
Rather than not saving and then relying on loans to get us through, we plan in advance and prepare for upcoming purchases. There are always going to be priorities and sometimes they will change. Being able to plan and prepare with flexibility brings peace of mind to our financial situation. We are far more comfortable saving to spend on expenses we know we will face than we are spending, spending, spending then scrambling because we did not give it the proper attention and preparation when we had the chance.
What is a Sinking Fund?
A sinking fund is a fancy name for an expense saved for over several months. To set up a sinking fund we recommend designating a no-fee savings account for this fund. This will give you a place to save the money until you need it. How much do you need to save each month? Use the total amount needed, divide it by the number of months you have to save for the expense and the total will equal the amount you need to set aside monthly to reach your goal.
Here are two examples:
Annually you must pay $600 in professional fees, you have 12 months to save for it – so you will save $50 per month (600/12 = 50).
Every two years you’d like to go on a family vacation and will need $6000 for the trip. You have 24 months to save for the vacation, you will need to save $250 per month (6000/24 = 250).
Sinking funds are a great tool for larger expenses, whether they are basic needs or luxuries. Use them to smooth out your cash flow and achieve your financial goals.