Owning a car is a lot like owning a house. It’s incredibly exciting when you sign on the dotted line and have a brand-new vehicle to drive every day. But hidden expenses abound with even the newest and best-made cars. And when you have an unexpected expense, you likely may not have an emergency fund large enough to cover the cost. There’s a tool you can use to avoid this, and it’s called a sinking fund.
Maybe you do have enough money socked away to cover the unexpected car expense. But the problem is that you were saving that money up for a vacation. Now your dreams of sipping margaritas on the beach are dashed unless you take out a loan for the car, which comes with the added expense of an interest rate.
But what if you can be prepared for the car expense, while also keeping the money for your vacation? While simple in execution, having a sinking fund will keep you prepared for life’s unexpected expenses, which we all know are coming, and likely when we least expect them.
What is a Sinking Fund?
Say that vacation you were planning to a tropical island is likely going to cost you close to $6000. So, you start saving $500 a month beginning in January, with the plan of going on vacation the following January. With $500 put away each month, you’ll have the $6000 you need after 12 months.
But halfway through the year, you take your car in for service and find that you need a new transmission, which is going to cost $2000 to repair. With a sinking fund, you can prepare yourself for that expense while continuing to save for your vacation.
The beauty of a sinking fund is that you gain both peace of mind, and you can plan for fun expenses and not feel guilty about it when you pull the trigger. Sinking funds allow you to save for both everything you need and everything you want. The best part is, having an active sinking fund gives you permission to spend.
You can plan for a car repair, or you can plan for a brand-new car. At the same time, you’re planning your next vacation and your next home remodeling. You’re also preparing for the unexpected, like the washing machine breaking, or your furnace going out in the middle of winter.
Life doesn’t map out when it’s going to throw a curveball your way. And there aren’t many worse feelings than having a huge expense gut-punch you with no means of paying without taking out a loan. A car repair is one of those significant expenses that you have no choice but to take care of right away. You need your wheels. And if you haven’t planned for that expense, you’re going to have to make other sacrifices.
Here’s How a Sinking Fund Works
Instead of saving for one big item, a sinking fund has you save for multiple things at once. You may have to delay your vacation by a few months or find a way to spend a little less on the location. But at the end of the day, you’ll be prepared for everything life throws at you.
With $500 a month set for savings, here’s what your sinking fund could look like:
- $250 for vacation
- $200 for car repairs
- $25 for home repairs
- $25 for medical expenses
At the end of 12 months, here’s what your sinking funds would look like:
- $3000 for vacation
- $2400 for car repairs
- $300 for home repairs
- $300 for medical expenses
While you won’t have as much money as you hoped for your vacation, you’ll be much more prepared for other significant and unexpected expenses, like replacing your car’s transmission. So while the margaritas on the beach may have to wait a few more months, you’d much prefer to put off the vacation in exchange for a working vehicle. Not repairing your car is not an option. But changing the time or place of your vacation is. There are those things in life that you need, like a working vehicle, and there are other things in life that you desire, like a vacation. Although some may argue that they need that vacation just as badly, life is all about priorities.
At the end of 12 months, maybe you didn’t have any home repairs or medical expenses. Now you can either continue to save those funds and pad them the next year, or you can put that money back into your vacation knowing you’ll be starting the sinking funds up all over again in the new year.
Bottom Line on Sinking Funds
Personal finance is all about proper planning. If you don’t have a plan, you are going to waste money and will not be prepared for life’s unexpected twists and turns. A car repair is one of those expenses that you have no choice but to tackle.
What could make matters worse, maybe you were never saving for a vacation in the first place. What if you aren’t actively saving any money at all? In that case, not only is there no vacation to look forward to, but now you’re heading to the bank looking for a loan that you’ll have to pay interest on — or begging your parents for money.
With a sinking fund in place, you’ll have one of life’s most invaluable assets: peace of mind. Maybe your car repair fund isn’t quite enough to cover the cost, but at least now you can tackle the bulk of your expense and only beg mom and dad for a couple hundred dollars, rather than a couple thousand. Or maybe the car repair costs less than the money you’ve been saving up in advance. Now, you may have enough money to take that $6000 vacation that you’ve been dreaming of for so long.
But if you’re smart, you’ll keep those funds flush with cash. Think about what a great feeling it will be to look at your bank account and know you’re prepared for whatever life throws at you.