If you’re someone who sticks to a well-thought-out monthly budget (and you should be), you’ll be in good shape to cover all of your usual monthly expenses, like housing costs, auto insurance, phone bills, etc.
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But what happens when it comes time to pay a non-monthly expense, such as a bimonthly haircut or an annual vacation?
If you haven’t planned ahead and saved, paying for these expected, non-monthly expenses means you’ll likely have to cut back somewhere else — either from your discretionary spending, or worse, from long-term financial goals such as saving for retirement.
Here is where a sinking fund comes in. Unlike an emergency fund, a sinking fund is there to cover the expected expenses that may come up only once or a few times a year.
So how much should you keep in a sinking fund to be prepared for these costs? Here’s what experts had to say.
Start by Calculating All of Your Non-Monthly Annual Expenses
The amount of cash you should keep in a sinking fund will depend on your personal expenses, so there is no one-size-fits-all answer.
To determine how much you should keep in yours, first calculate the expenses you may need a sinking fund to cover over the course of a year.
“A sinking fund is designed to handle anticipated, non-regular expenses without disrupting your usual financial flow. This can include costs like annual insurance premiums, scheduled car maintenance, holiday gifts or yearly subscriptions,” said Jeff Rose, CFP, founder of GoodFinancialCents.com.
“It’s a strategic way to manage expenses that are expected but not consistent, ensuring you’re financially prepared when they arise.”
To determine the amount to keep in a sinking fund, identify and list the anticipated expenses and their estimated costs.
“Then, divide each expense by the number of months until it’s due,” Rose said. “For example, if a $300 expense is six months away, allocate $50 per month to your sinking fund. This method ensures that when the payment is due, the funds are readily available without causing financial strain.”
Consider Where You Will Keep Your Sinking Fund
You will likely want to keep your sinking fund in a savings account, which may factor into your calculations.
“An aspect to consider is whether your sinking fund will be held in an interest-bearing account. If so, the rate of return should be factored into your calculations to assist you in getting to your goal sooner,” said Andrea Osorio, senior wealth advisor at Citi Personal Wealth Management.
“The more time you have to achieve your goals, the more interest will play a role in your total returns. Consider utilizing a free sinking fund calculator that can be found online to help you determine the exact figures for your situation.”
You may want to have multiple “sinking funds” for different expenses.
“For example, you may have a sinking fund for property taxes, yearly insurance costs, vacations or even Christmas gifts,” said Kendall Meade, financial planner at SoFi. She recommends automating savings towards these sinking funds.
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This article originally appeared on GOBankingRates.com: Here’s How Much Cash To Keep in a Sinking Fund, According to Experts
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