Most of my own financial mistakes have resulted from being unprepared for a situation I should have anticipated. As an Eagle Scout, I should have known better. In every scout meeting we would recite the Boy Scout Motto – “Be prepared.”
The concept of sinking funds is simple, but very powerful. A sinking fund is an account (or envelope if you are using the envelope system) that is dedicated to a large, infrequent expense or purchase. Common examples of sinking funds include: vacation fund, car repair fund, Christmas fund, home repair fund, medical expense fund, car purchase fund, and furniture purchase fund.
To show how sinking funds work, let’s walk through an example – the car repair fund. Car maintenance can be expensive, but it should not come as a surprise. We all know our cars will need new tires, new brakes, oil changes, a new battery, etc. Less frequently they will need something major, like a new radiator or CVC joints. It may be difficult to predict the precise timing of these expenses, but we all know the expenses will happen.
In anticipation of these inevitable expenses, we set up a car maintenance fund and contribute to that fund until it is fully funded in a pre-determined amount. That way when the expenses do occur, we have cash to pay for them.
The amount you should have in your car maintenance fund depends on your car and your circumstances. I would suggest you start with a goal of $500. If you contribute $100 per month, you can reach that goal in 5 months. If you meet that goal and have additional resources, I suggest you increase the amount to $1,000.
The same principals will apply to every major expense and purchase. Establish a sinking fund. Fund it, then pay in cash. By doing so, you will dramatically change your financial life. The keys to sound finances are anticipating, planning, preparing, being proactive, and being patient.
For more information contact your Yuba City bankruptcy attorney.