Plan ahead for large expenses: Introducing the sinking funds.
When my husband and I bought our house (25 miles outside of SF), we also bought earthquake insurance. Whether or not we actually need earthquake insurance in our current location is debatable but we would rather be safe than sorry. Earthquake insurance is not cheap and every September we owe $2,500 for this coverage. Yikes! This is a hefty bill to receive once a year so we use a sinking fund to cover the expense and relieve our anxiety of coughing up so much money at once.
Here is how it works:
- We opened a savings account just for our earthquake insurance. Ally Bank also has buckets so you could set up a bucket for earthquake insurance but I prefer a separate savings account. At Ally you can change the name of your savings accounts so this account is titled Earthquake Insurance. It is important to name your savings accounts to reflect the goal or purpose.
- Divide the yearly payment by 12 months.
- Add this monthly expense to your budget. You may have to make some adjustments to ensure you can cover this expense.
- Set up an automatic monthly transfer for this amount from your checking account to your new savings account.
- Relax.
- Feel immense relief when this bill arrives because you already have the money saved
My husband and I use sinking funds for Christmas (saving $100 a month), vacation (saving $700 a month), yearly emergencies (saving $500 a month), car maintanence, etc.
The goal is to stop using credit cards for your expenses (unless you are paying the statement balance in full each month) and to start planning and making these expenses part of your budget. It is better to plan and not need the money then be caught off guard and have to pay over 20% interest on your credit card.
Take a look at some of your largest yearly bills, divide the number by 12 and figure out how you can start incorporating this expense into your budget.
Need help creating a budget?
You have 3 options:
- Use my personal budget template with video instructions to customize ($50). Link to product.
- Take my budgeting course ($40/mo for 5 months or $197 one time payment)
- Work with me one-on-one to create a budget that works for you ($500, email me for a monthly payment option). This product includes 3 meetings: 1st) To estimate expenses and create a working budget, 2nd) A mid month meeting to enter expenses & reflect on the process and 3rd) End of month meeting to finalize monthly expenses and revise budget as needed. Click here to read more and book your appointment. Space is limited.
Other financial news.
Ally Bank is now paying 1.40% on their savings account while Wells Fargo and Bank of America continue to pay 0.01%. Opening an online savings account at Ally is an easy way to increase your return by 115%! To learn more about high yield savings accounts, read my blog post or take my online class.
I Bonds. As my husband and I bought our first I Bonds in November 2021 and more in January, we are learning by doing. Here are two more things I learned in this process: 1) Your I Bond will payout every 6 months from the date of your purchase. The bonds we bought in January just paid out at the end of June. 2) When you buy your I Bond, you will have that interest rate for 6 months. In May the I Bond interest rate was reset to 9.62% from 7.12%. However, the bonds we bought in January continued to receive the 7.12% until July 1. To read more about I Bonds, read my blog post.
Disclaimer: I am an educator, not your personal financial advisor. Please make sure to do your own research before moving forward with any actions discussed in this blog post.
Know that all investments involve some form of risk and there is no guarantee that you will be successful in making, saving, or investing money; nor is there any guarantee that you won’t experience any loss when investing. Always remember to make smart decisions and do your own research!
