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Sinking Funds

by Jeffrey Kosola on September 1, 2010

Continuing along with the Debt Destroyer, today’s topic is Sinking Funds.

Sinking Funds are a quick and easy way to make budgeting simple. A sinking fund can best be described as a pool of money that is set aside to cover future payments. I use sinking funds as the back bone of my financial system. Watch the video to learn how to set one up quickly and start saving a ton of time each month.

Example: A utilities fund

  • Electric
  • Gas
  • Water
  • Internet/cable
  • Cell phones

Review the last 12 months of payments to each company above. Add the payments up and divide by 12 to get the monthly average for each. Then add up the five payments and divide by the number of paychecks received in a month. The resulting number will be the amount needed to fund all the bills for the month for each paycheck. Add in a 5% fudge factor and you’ll always have enough money to cover the monthly bills. Beware of changes you make to these accounts, they could effect the amount you need. If this happens just make the necessary adjustment.

Tip: Open a separate account for the utilities fund and have the companies draft the monthly payments for the account. This will really put your finances on autopilot.

If you’d like to READ more about Sinking Funds, this is a post I wrote about how to set up a sinking fund.

The next installment of the Debt Destroyer will show how I use ING to handle all the money that flows into and out of a pizza dude’s fingers. Good luck setting up and using sinking funds :-)

Download the video
Download the mp3

{ 10 comments… read them below or add one }

Forest September 1, 2010 at 11:26 am

Hey Jeff, I couldn’t watch the vid right now but will try and come back.

The sinking fund idea is a great one and we will be doing it with an envelope. Our bills here in Cairo are all paid in cash.

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Jeffrey Kosola September 2, 2010 at 10:59 am

@Forest envelope are PERFECT! I like that Cairo is all cash. That’s how China was when I lived there.

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Little House September 1, 2010 at 12:22 pm

I use a similar system, though a little more simplified. Because I live on a variable income, the months I bring in more money, I set aside for next months bills in a separate account. Then, if I come upon a month where I’m a little tight, I already have put aside a chunk of money for the bills. It’s something I only just started figuring out. I really don’t know why it took me so long!

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Jeffrey Kosola September 2, 2010 at 11:00 am

@Littlehouse I hear ya on the taking forever to figure it out. I wish I would have known this years ago. But then again DeliverAwayDebt would never have been born :-)

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myfinancialobjectives September 1, 2010 at 5:56 pm

Sounds like you’ve got a great plan set up. That idea really does simplify your finances. I don’t do anything like that right now, just because my total expenditures are so low, and because I like to manually pay my loans (I honestly get satisfaction in doing so), but if I DID have a different situation, I think I may give this a shot! Sounds like an easy way to make sure you always have enough for your fixed expenses!

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Jeffrey Kosola September 2, 2010 at 11:02 am

@MFO I completely understand the satisfaction of paying it down yourself. I have all my bills on auto pilot except the one I’m snowballing. I get to see the progress with every payment I send. Boy is it a great felling to keep paying these debts off :-)

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Kay Lynn (Bucksome) September 3, 2010 at 8:56 am

I don’t do sinking funds for monthly bills like your example but rather the once or twice a year expenses such as homeowner’s insurance, property taxes and car license.

I’m looking forward to seeing how you have it set up with ING. I have my emergency fund at ING, but really should move over my sinking funds as well.

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Jeffrey Kosola September 3, 2010 at 9:14 am

@Kay Lynn I also use the sinking fund for my 6 month and 12 year bills too. I’m glad you use them :-) I’ll be posting the ING process next week, so say tuned…

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debt management uk September 16, 2010 at 7:42 am

This topic very very useful to us. because everyone want debt destroyer.so Thanks

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joshaya godfrey mhando December 4, 2011 at 6:20 am

Very helpfully

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