Whether you are new to budgeting or an old hand at it deciding whether to use a sinking fund or cash flow for an expense can be a pain in the neck. Lets start at the beginning and talk sinking funds for a moment.
What is a sinking fund?
Sinking funds are money you put away regularly to pay for a known expense in your short to medium term future. Take back to school expenses for an example. They come every year without fail. There is always something needed for school be it a new school bag, a new uniform or maybe the whole kit and caboodle. So the best plan of attack is to squirrel away a little bit of money, regularly, to cover the cost. A sinking fund in a nut shell.
What is cash flowing?
Now we know what a sinking fund is. What is cash flowing? For this to make sense let me give you a scenario. You’re doing your budget up and remember it’s your neighbour’s 60th birthday in 3 weeks. You are not prepared and do not have a sinking fund. However you want to get her a small gift and you know there is a small amount of money in your budget you could allocate to it. So that’s what you do. You decide how much of that available money in your budget can be allocated to the gift.
How do decide if you need to use a sinking fund or cash flow an expense?
Write down a list of short term expenses in your near future. Christmas, birthdays, dog grooming, date night, turf or home heating oil etc. Now decide which are the priorities. What do you actually care about? You will have a mix of big and small birthdays coming up. Your son’s 7th birthday is naturally more important to you than your co-workers 42nd birthday. For your son’s birthday should you use a sinking fund or cash flow it? I would say sinking fund. There will be a rough estimate in your mind of what its going to cost for his birthday. It would be easier to put away a small bit each week or month to cover that cost.
Now what about the co-worker? Depending on how close a relationship you have you may want to use a sinking fund or cash flow this. Assuming this is your work bestie and you know 3 months out you want to buy them something special you may want to use a sinking fund. However if the co-worker is someone you occasionally talk to and would like to get them something you may chose to cash flow their birthday.
There is no cut and dry formula with personal budgeting. You do what works best for you. So if there’s a specific amount you know in advance you want to spend I would use a sinking fund. If you’re happy to allocate whatever you have spare to an expense then I would use cash flow.
What if you haven’t enough in your sinking fund?
You’ve saved all year for Christmas and you don’t have enough saved. You under estimated the amount you needed to put aside. All is not lost! Cash flow it. An example would be €900 in sinking fund but need €1050. You’re short €150. You know there is €100 spare in the budget that you can cash flow but you’re still going to be left €50 short. You’re options are
-borrow from another sinking fund and pay it back.
-tighten the budget. Maybe less spent on personal money/ family fun or takeaways.
-earn some extra money. Work a few hours over time or sell some unwanted items. Maybe do some paid online surveys.
The key thing to take away from this experience is to up your sinking fund contributions for next year. You don’t want to be caught short a second time.
There you have it, whether you chose to use a sinking fund or cash flow an expense comes down to personal choice. That’s why its a personal budget and not a bog standard one size fits all.
For more information about using a sinking fund or cash flow check out..
The Irish Budgeting Mammy, also known as Ann-Marie, has a great post on sinking funds. If you’d like to check it out press the link. Ann-Marie is a mammy first and foremost but she is also the creator of The Budget Book. She includes sinking fund trackers in her budgeting book because they are a great tool when you are organising your money.
Another great resource on the topic of sinking funds can be found at this link. Santis from The Caribbean Dub has created her own budgeting style based around priorities. So sinking funds would be part of her Four Families budget and would be under The Long Family. There is also the Walls, Jones and Fundays categories in Santis’ priorities based budgeting system.