Three weeks ago I’m standing in Target crossing off the list Christmas gifts we had already purchased. My wife, who had been looking at some kid clothes, comes up to me and says, “I’m having so much fun Christmas shopping this year!”
Amazed at her enthusiasm I said, “Who are you and what have you done with my wife?”
After giving me the duck face, she replied to my quip, “It’s just so much more fun when you use cash when paying bills and purchasing the.”
That comment was in my top 5 moments from this past Christmas. Knowing our money management system was enhancing our relationship and making such an emotional impact on my wife was priceless.
If you are wondering how we had the cash to pay for all our gifts, it’s not because we allocated that much more in our December budget than normal. We started saving for Christmas in January, using a tried but true concept known as a sinking fund.
The Sinking Fund Theory to Paying Bills
The concept of a sinking fund is not new. Yet so many people fail to utilize this simple money management technique to make their lives easier. It’s one of the best practices to help you eliminate overspending moments in your monthly budget.
The term “sinking fund” is used to describe the practice of periodically (in our case monthly) setting aside money for paying bills or any expense. The best way to accomplish this is through your bank, using an automated transfer of money between accounts. At the beginning or end of each month, transfer money from your checking account into your savings account, enough to pay the expenses that are soon to be due.
You will then have to find some way to track how much you have saved for each expense. We do this with an Excel spreadsheet. You can download a .pdf sample of what ours looks like by clicking here or on the Excel image to the right.
First, I designate categories that receive money each month by giving that category a name. I then research my bills to know exactly when those expenses are coming and mark those payment months with a gray box in my spreadsheet. Finally, I deposit enough into that category each month so I will have no trouble paying bills when they arrive.
We mostly use our sinking fund to be prepared for bills that don’t come monthly. The current bills we save for are life insurance, car insurance, umbrella insurance, trash pickup, pest control and our AAA membership.
In addition to paying bills, we also use it to save for summer vacation, Christmas expenses, veterinary and other dog related issues, and expenses associated with the start of school (books, clothes, fees, etc.)
A sinking fund can also be valuable for long-term saving. We currently have over half the money we need to purchase another vehicle as we are outgrowing our minivan. Another 12-16 months of saving and we will be looking at upgrading to a used Suburban-type vehicle. Best part is that when the time arrives, we will be able to pay for that vehicle with cash.
I cannot begin to describe how valuable this has been for us. Besides not going into debt for purchases, the biggest benefit of this process is the relaxation it brings to our spirit when we are out shopping or paying bills. It makes spending money enjoyable and, at some level, a very satisfying reward for our consistency and discipline in saving.
So avoid that sick feeling in your stomach for the Christmas shopping season of 2014 and all those bills in between. Start saving now and experience how fun and relaxing spending money can be.
Questions: Do you ever have trouble paying bills because you forgot the expenditure was coming? Do you save monthly for future bills or purchases? How did you pay for your Christmas presents this past year – cash, debit card, credit cards, other?