Sinking funds

My budget worked perfectly for three months. Then the yearly bills arrived, all at once, and blew it apart.

In Level 1 you met irregular expenses: costs that don’t come every month, like renewals, repairs, travel and festive spending. They’re the most common reason budgets fail. The fix is a sinking fund.

A sinking fund is money you set aside a little at a time for a cost you know is coming. When the bill arrives, the money is already there.

How it works

1. List your big, non-monthly costs for the next year, and what each will cost.
2. Divide each one by the number of months until it’s due. That’s what you save each month.
3. Keep the money separate, so it doesn’t get spent on something else.

Say your phone insurance renews in 10 months and costs $200£150€150₦60,000$200. Set aside $20£15€15₦6,000$20 a month, and when the renewal arrives, it’s already paid for.

Sinking fund or emergency fund?

They’re not the same thing:

• A sinking fund is for costs you know are coming: the yearly renewal, the festive season, a holiday.
• An emergency fund is for things you can’t predict: losing your job, a medical bill, a sudden repair. You’ll build one in Level 3.

Once I started sinking funds, December stopped being a crisis. It was just another month I’d already paid for.