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My earliest job as a child was mowing the lawn. One hot Michigan summer afternoon, Superhero Dad decided it was about time for me to contribute to yard work beyond raking leaves in the fall. After a few minutes of coaching on how to prime the gas line, start the engine, empty the mulch bag, and operate the self-propelling mechanism, Dad headed inside and left me to get to work.
Our lawn was average for our neighborhood: one-third acre in size, trees and other obstacles galore, and dusty. I quickly learned to hold my breath when emptying the bag into the backyard compost pile.
After approximately two hours of navigating countless twists, turns, and bumps, and contemplating the treasures I could purchase with my new income, my work was complete. Like any self-respecting nine-year old, I marched up to Dad, who was reading the newspaper in his recliner.
“I’m done,” I said, extending my open hand in anticipation of a rich payment.
“OK. Let’s go take a look,” Dad replied.
After touring the yard and noting the deficiencies in my work, the long-awaited moment finally arrived. Dad reached into his pocket and presented me with a crisp $5 bill.
I don’t recall experiencing any exuberant emotion at the time, though in hindsight, $5 was probably a fair lawn-mowing rate for a nine-year-old boy in the mid-1990s. But I do remember walking to my bedroom, closing the door, and slipping Mr. Lincoln into a manila envelope in my night stand.
Like many of my earliest financial lessons, I learned the practice of safe-guarding my money in envelopes from Superhero Grandpa. Grandpa had envelopes for everything, each with a hand-written label, secured behind the solid walls of his safe.
I didn’t know it at the time, but several of Grandpa’s envelopes were intended to save for future purposes. Among the purchases made from one of Grandpa’s envelopes was one of the last vehicles Grandpa purchased: a brand-new 2008 Honda Accord EX-L. The story of how Grandpa walked into the showroom with a brown bag full of cash one day after test driving an Accord is one of my all-time favorites.
One year after Mrs. Superhero and I were married, Grandpa approached me and asked if she and I would be interested in buying the Accord; he had already gotten the itch to purchase a new vehicle. We were desperately in need of a fuel-efficient vehicle and had been saving money for months.; yet, at the time, purchasing the vehicle would have been a bit of a stretch.
After a few months passed, we finally had enough money saved to purchase the car. My hand trembled a bit as I sat down to write Grandpa the largest check I had ever written (at that time).
“Can you take me out for a ride in your new car?” Grandpa asked me.
“Of course,” I said. “Where are we going?”
“The bank,” he replied.
Moments later, we arrived at the bank. What I anticipated would be a short, unremarkable trip turned out to be lengthy and memorable.
“I want to cash this check,” Grandpa informed the teller.
The teller examined the check and flashed a stunned look, first at Grandpa, then at me.
“Sir, I have to recommend against keeping this much cash on hand. Would you like to make a deposit into your savings account?” she asked.
“No. I want the money,” Grandpa retorted.
After the teller’s acquiescence and subsequent counting of many $100 bills, Grandpa and I exited the bank. I was terrified that we would be jumped, robbed, and left for dead in the parking lot. Luckily, my worries were unfounded, and Grandpa and I arrived safely back at the house.
True to form, Grandpa immediately removed his new stack of cash from the teller envelope, placed it in a manila envelope, and locked it in his safe, but not before counting it once more, just to be sure it was all there.
The Sinking Fund: An Update to Envelopes
I did not know it at the time, but Grandpa had just added to his always-growing portfolio of sinking funds.
For readers who may be unfamiliar with the term and its application in personal finance, a sinking fund is an account designed to save for specific future purchases. A sinking fund is different from an emergency fund, as its contents are earmarked with an anticipated purpose, while an emergency fund exists to cover unanticipated expenses.
While Grandpa’s approach was commendable, it is advisable to maintain sinking funds in a savings or money market account which is separate from your emergency fund. If you are able to meet minimum balance requirements, it may even be wise to open separate accounts for each sinking fund. You do, however, want to be sure that your money is not eaten away due to senseless fees.
As an alternative, provided you have a sufficiently-funded emergency fund, you could invest your sinking fund money in CDs if you know you’re not likely to need it during the term of the CD. You should be certain that investing the money and losing access to it for the duration of the term will not cause undue hardship.
The Sinking Fund Test: Do I Need a Fund For _____?
The number and type of sinking funds you maintain should be tailored to suit your individual circumstances. The following guidelines and questions are intended to spark careful thought and consideration.
What items are nearing the end of their anticipated utility? (In other words, what items are likely to breakdown or require repair in the next six months to five years?)
What degree of difficulty would be posed if you were expected to live without these items for a set time period?
What upcoming purchases and expenses can you reasonably anticipate and begin saving for with a sinking fund? (Hint: Christmas is in December this year!)
In summary: If an item is likely to soon need replacement or repair, you need a sinking fund for it. If you can’t live long without this item, you need a sinking fund for it. If an expense is anticipated to be due within the next six months to five years, then you need a sinking fund for it.
FinanceSuperhero recommends that you organize your sinking funds based upon priority (Ask: What is likely to break first?) and fund them according to your ability to do so each month. Develop a rough calculation of the projected cost for the item in question and divide that total by the number of months remaining until the expense is anticipated; this is the amount you should budget to save within the sinking fund each month. Again, place funds in a simple money market account or high interest bearing online savings account, depending upon the amounts in question.
Among many other possibilities, the following items deserve your consideration when developing a list of necessary sinking funds:
- Vehicle replacement
- Christmas and birthday gifts
- Home repairs (roof, HVAC, sump pump)
- Home renovations (basement renovation, kitchen and bathroom remodeling, sizeable landscaping or the addition of a deck or patio)
Readers, do you utilize the sinking fund approach? For what types of purchases do you maintain sinking funds? Where you do maintain your sinking funds?
Mrs. Superhero saysMay 6, 2016 at 12:02 PM
Mrs. Superhero would love one of our funds to be putting in a swimming pool. 🙂
Hero saysMay 6, 2016 at 12:22 PM
Ladies and gentlemen, a rare comment from Mrs. Superhero. 🙂
amber tree saysMay 6, 2016 at 2:39 PM
A pool would be a great sinking fund…
We have a sinking fund for our future travel and a car replacement.
When thinking about it, we have many more. Each month we set aside 1/12 of yearly big bills that will hit us. This way they do not hurt at all…
Tristan @ Dividendsdownunder saysMay 6, 2016 at 9:48 PM
We have a sinking fund for our future IVF baby lol. That’s a really nice story about your grandpa, although didn’t he miss out on a lot of interest by having it in a safe?
Sounds like you have a request you need to get on with 🙂
Hero saysMay 7, 2016 at 8:48 AM
Tristan, good for you guys! I bet you are excited about the coming addition to your family.
While Grandpa was pretty smart with money, I am sure he did miss out on a lot of interest over the years. He was suspicious of banks in many ways.
I have a feeling I will soon be out back digging a big hole for Mrs. Superhero’s swimming pool. 🙂
Latoya @ Life and a Budget saysMay 8, 2016 at 10:08 AM
I love reading about your money experiences with your grandpa, they are so valuable! We have several sinking funds that we keep in our capital one 360 accounts.
Hero saysMay 8, 2016 at 9:32 PM
That’s a great plan, Latoya. As fun as it is to share stories about my Grandpa, I really wish I had recorded audio of his stories from his youth. Not all of them are money-related, obviously, but we he was quite the orator.
Apathy Ends saysMay 8, 2016 at 5:58 PM
Haha, funny to see your wife prioritizing the pool!
This is something we need to get better at, we usually find a way to absorb whatever happens but it would be easier to pull out an “envelope”
Hero saysMay 8, 2016 at 9:34 PM
We have been doing the same thing lately, AE. It is nice to be able to cash flow unexpected expenses as much as possible. I really feel pain when I have to dip into a sinking fund, or worse yet, our emergency fund.
Financial Slacker saysMay 9, 2016 at 12:59 PM
I use a sinking fund to buy cars. We started using this approach once we realized just how much interest expense you can save by not financing a car and how much negotiating leverage you have when you pay cash.
We also use the same concept for our FIRE fund. It’s separate from our emergency fund, from our age 65 retirement fund, and from the kids’ school fund. For me, I think it’s much easier to allocate your money into it’s different uses.
Rob @ Money Nomad saysMay 10, 2016 at 12:21 AM
Sinking funds are a great concept – although I agree with you, it’s probably better to avoid keeping them in cash. I would probably use a tool like Betterment or Wealthfront to invest these funds in a conservative way while saving. Great blog and I look forward to seeing more content!
Hero saysMay 11, 2016 at 9:39 PM
Thanks, Rob. I should probably look into moving our sinking funds into accounts that pay higher interest. At this stage, we aren’t missing out on any significant earnings, but in time, this will be more important.
The Millennial Budget saysMay 10, 2016 at 8:35 PM
Well I learnt something new today, never knew what a sinking fund was. I knew the concept but not the technical term so thanks for that. I think sinking funds are great as they are goal driven. Goals make people work harder which is something I personally like.
ZJ Thorne saysMay 27, 2016 at 4:04 PM
I did not know they were called sinking funds, but I’ve been doing this earmark for years. Thankfully, my online bank allows me to have tiny balances on multiple accounts without dinging me. I absolutely want a great bed. That gets its own dedicated fund. Same for travel and business expenses. Etc.
Am I Making Cents saysJuly 4, 2016 at 4:14 AM
I’ve been using sinking funds for just over a year. I started when I paid off a car loan, but continued making the payment into the savings account so I can pay cash for the next car. I use Capital One 360 and also have accounts for travel, Christmas, home maintenance (for a roof, water heater, etc.). I love the concept and am saving aggressively .
Hero saysJuly 4, 2016 at 5:00 PM
I have heard great things about Capitol One 360. You are wise to keep paying yourself a car payment. Those funds, when combined with the equity in your current vehicle, should help you to purchase a nice upgrade when the time comes. Thanks for sharing your experience, Am I Making Cents!
Ms. Steward saysAugust 10, 2016 at 1:55 PM
I maintain sinking funds for tons of our regular annual expenses (Christmas, taxes and registration, etc.) We don’t yet have funds for the new HVAC units we’ll need sometime in the next 5-10 years, or the new cars we’ll eventually need. That’s because we’re saving up an emergency fund of 4-5 months of expenses in case any one of those goes out in the meantime.
How do you recommend saving towards sinking funds? Would you preference retirement over them, and at what rate?
Hero saysAugust 10, 2016 at 7:01 PM
I’m glad to read that you utilize a sinking fund approach, Ms. Steward. I firmly believe it is very helpful for most families.
To answer your question, I think prioritizing sinking funds over retirement depends a great upon individual circumstances. I wouldn’t recommend investing at the expense of your ability to pay your annual property tax bill; that’s an obvious and silly example, I know. But would I prioritize it over the sinking fund for a new 4k TV? Definitely.
Finally, with regard to where to keep sinking funds – a regular money market or high yield savings account is appropriate if you know that you’ll need the money within 6 months to 3-4 years. If you know you won’t need to touch it for at least 5 years, a CD might be more advantageous.
Tom Loftus saysOctober 12, 2016 at 10:40 AM
Dang, great advice followed by a great list of comments and commentators. I really just wanted to add mine so that I’d be with the cool kids. 🙂 One value-add comment I could add is that Everydollar.com is a solid tool that works well along with this strategy. Literally helping you “spend” every dollar of your income before receiving it and keeping you on course. (Man, I need to get an affiliate link from them). Keep it up. Thanks SuperHero!