If you do Dave Ramsey or something similar . . .

[Mickey'snewestfan]

How do you decide whether to "cashflow" something or put it in a sinking fund?

Right now the only debt I have is a car note, with about $5,000 to pay it off. I've paid off all my credit cards and other debts. However, my bank account is way less than I want it to be, so I thought I'd try out his program as a way to build up my savings.

If I make a budget that only consists of things I pay every month (rent, food, electricity, gym membership), I have about $1600 a month left. However, almost every month there's something else I need to pay. Sometimes it's small (a $70 soccer registration) and sometimes it's huge ($1200 for camp for most of the summer), and sometimes it's multiple things, but it's pretty much always under the $1600 mark. Or it's Christmas, or something like that.

So, I figure I could do one of two things. I could set up "sinking funds" and put aside 1/12 (or 1/6 if it's car insurance that I pay twice a year) of the cost every month, resulting in relatively consistent snowball payments month to month at about $1,000, or I could simply take it from the snowball during the month when I need it, and send of vastly different amounts averaging about $1,000.

I think the former is the "Dave Ramsey way" but the latter seems much more logical to me, and certainly less of a hassle.

I'm curious what others do, and why.

So, I figure I could do two things. I could divide the cost of the things

 

[LoriKutchey]

I've been doing that for years now. Probably a decade, I think I first read about dividing things up like that in a book by Mary Hunt and she calls it a Freedom Account. Things in my freedom account include, auto insurance, vets, christmas, auto license tabs, house property taxes, cottage property taxes.... These are just my examples you could do that with any expenses.
It truly makes my llife alot easier when things come due that I have money already set aside for it.

 

[TnTWalter]

Sinking funds is also in Dave's plan....I would say it goes AFTER baby step 3 the fully funded Emergency Fund....

because while you're dumping debt you should not being doing too much extra...you are supposed to be INTENSE....QUICKLY get out of debt.....$5k shouldn't be hard.

THEN build up 3-6 months of EXPENSES into your EMERGENCY FUND [when a kid breaks a tooth, car repairs, roof, loss of job, whatever]....only touch if there's an emergency and then BUILD back up immediately.

now add sinking fund items to your budget....because now you have money going to you instead of the car payment or the emergency fund, etc.

i.e.xmas is the same time every year...so you take your planned amount and divide / 12 same with car insurance kids programs etc. etc.

We have a set amount for our 3 kids activities [more than our vacation budget! ] and we divide / 12 so we budget for it every month. We only pay car insurance twice a year but we account for it monthly if that makes sense, etc.


but it could also be added during step 2 ... 2 B ... sinking funds that is....the only fear is that an emergency would occur and you might have to get new debt which would put you backwards.... I suppose you could always take from your sinking funds for an emergency...but it makes more sense just to get fired up about $5k get it out of there and then start building the EF....

 

[Mickey'snewestfan]

OK, let's imagine that my sinking funds are all things that are 4 walls-ish. Car insurance, summer camp (aka childcare), non negotiable things that aren't surprises. I know that if I had less money to play with, I'd need to put aside money every month for summer childcare, as I wouldn't be able to pay it in just one month. But if I can pay it in one lump sum, then why wouldn't that be better?

 

[chris31997]

Not sure I follow you. But generally speaking, DR says 1:$1000 emergancy fund just in case something happens, 2:dump all debt, 3: 3-6months emergancy fund, 4:retirement 15%, 5:college, 6: pay off morgage, 7:give.

After step 3, when you have security in case murphy or a budget buster happens, you can save(or the sinking fund) for new car, new whatever. Childcare, Christmas and items along those lines should be accounted for in your monthly budget and if possible saved for. Create a savings for Christmas/Summer Camps. Sometimes you can get a deal by paying for it all up front sometimes not.

Does that help?

 

[Mickey'snewestfan]

No, I don't think you're getting what I'm asking. I'm not talking about expenses that can wait until I get to Baby step 3.

If it's something Dave approves of paying, even in the early Baby steps (such as childcare or car insurance, neither is a luxury in my definition), and you can afford to pay it in a single month, should you still put aside money each month?

To give an example. I am sending my son to daycamp this summer as form of childcare. This particular camp costs a little under $1600 for the summer (trust me, that's good around here) with $400 due when you sign up in January (or you're closed out) and $1200 due May 1st.

This year is already taken care of, but if we're thinking about next year, do I put aside $133 every month, or do I just put $400 less towards my snowball in January and $1200 less in May?

Similarly, I have car insurance that's $300 (I'm rounding here) that's due in June and Dec. I could aside $50 each month, or I could just pay $300 out of that month's budget and put less to my snowball?

I do have an emergency fund, actually $2,000, since I feel that as a single parent I'm more vulnerable to something like a job loss or illness than someone with 2 incomes. So, if something went wrong and I didn't have that $1600 left I could dip into it.

 

[vicki_c]

I like the YNAB approach (you need a budget) - Every dollar has a job. You budget to zero.

So what are you doing with that money in the months when you don't need it for those big infrequent expenses? It's "job" should be to be set aside as 1/12 of the annual payment for something, for example -- sitting in an account so you can use it + its 11 other equal amounts when the bill is due.

And so on for all your other infrequent expenses. Once you budget and set aside for all those in the month, anything left over (which seems to be your case - you have extra) goes into your real savings or as extra for the snowball -- for that month only.

Your snowball amount towards your debt should always remain the same, unless it goes up due to increased income or a windfall or something.

 

[bumbershoot]

We started off with sinking funds for everything. Car registration, clothing (small clothing fund, we don't have many clothes), power (it's once every 2 months, they bill towards the end of the month with just a week until it's due, and I ALWAYS forgot it and had to scramble), just everything.

But slowly came away from that. Clothing is taken, as needed, from the "extra" that becomes extra snowball at the end of the month. (right now we're on hold, but in a couple months it will be "amount we spent on those things, amount we used to put towards car, and amount of our debt payment" as our Snowball...everything left at the end of the month is an "extra snowball" or Snowflake (big snowflake, but snowflake all the same) that also will go towards the debt)

Power still gets put in a sinking fund (and right now it's drastically OVERfunded and I get to decide what to do about that), and we got ahead of ourselves with insurance. It took 6 months of paying our normal insurance payment AND saving the 6 months premium for the next renewal period which was hard ,but VERY worth it! I think those are our only sinking funds right now.

Everything else just comes from the future-snowflake aka monthly budget. Works best for us!

 

[2disneyboys]

I think the theory in sinking fund (each month putting aside the 1/12 of the annual cost) being the better option is that you never know when something bad could happen so rather than planning to pay the expense in full in a particular month, you are proactive and put aside a monthly amount in advance.

lets say you have your $2000 emergency fund.
and you have $1500 left each month after all your regular bills etc are paid. if you don't do a sinking fund for something (use the summer camp example) you'd be ok to pay it out of your "extra" for the month, but lets say the month you were planning on using your "extra" money for the summer camp ended up being a bad month that could potentially use all of your "extra" money as well as all or most of your emergency fund... these months do happen sometimes... if you DIDN"t have a seperate sinking fund, then you would be SOL by not having the sinking fund monies set aside, and by not having extra that payperiod and having used up most of your emergency fund.. yea.. thats a worst case example, but also a very realistic example of how otherwise financially sound people end up into more debt..

I have been "doing" it the Dave way since Sept 2010 and I have certain things built into my budget for each month. Its just part of my monthly expenses, however, I don't "really" pay those bills each month, just "move" the money to my sinking funds savings account (a whole seperate account from my emergency funds) Example, we have OIL heat... so we only pay for OIL when we need our tank filled. This past winter, we filled it twice to a tune of about $600 each time. Each month I budget for oil (even during the summer) and move that $125 from my checking account to my sinking funds savings account. I do the same thing w/ my annual flood insurance premium, my boys private school tution, our car insurance, car registration etc. each month I send that money to my SFSA (sinking funds savings account) and then when those bills roll around, I just transfer the appropiate amount back to my regular checking and pay the bills. there are "lots" of months that I could pay one or all of the categories in full for that month from the "xtra" money in our account.. however, I instead am using that extra money for other jobs... first I used it to build a mini emergency fund, then I used it to pay off what little credit card debt we had (very little so it went away fast) and now I am using it to build our 6-9 month emergency fund account. We already invest 20% of our income in various retirement fund vehicles and also have been working on college funds for our two boys since they were conceived. we have a modest amount left on our mortgage and our plan is after we have 9 months worth of income in our emergency fund, we will then double attack the mortgage.

the sinking funds approach is not the ONLY way or even the RIGHT way for everyone. It made a lot of sense to DH & I so it's the way we picked for our family. Hopefully I didn't ramble too much and this made a little sense

 

[mrodgers]

I think I'll just use my extra left over, I have $1600.
Summer camp is due in 2 weeks. $1200, no problem, I'll have $1600. Whoops, the timing belt just went in my car! What? My car now needs a new engine?!?

There goes your $1600 and more that you "knew" would be no problem paying the summer camp out of the extra.

Sinking funds for known expenses even during paying debt off (car insurance, house insurance, taxes, summer camp, etc.)

Sinking funds for saving up for possible future expenses after debt is paid off (car repairs, home repairs, etc.)

 

[rszdtrvl]

But Dave would say to not send your children to camp as your financial stability is more important than their camp experience.

I have been doing a somewhat modified Dave Ramsey for a while. Set up a budget, working on the credit cards, etc. But I am putting money towards the credit cards, as well as into savings (he would say pay the minimum on credit cards and stash the rest away into savings - whatever is budgeted).

To me, a child going to camp and family vacations are just as important as reducing debt. And if you gain a bit of debt building those experiences, but can pay off the debt, then go for it! Memories are important!

 

[TnTWalter]

I do have an emergency fund, actually $2,000, since I feel that as a single parent I'm more vulnerable to something like a job loss or illness than someone with 2 incomes. So, if something went wrong and I didn't have that $1600 left I could dip into it.

I think you have received much information on the sinking funds.

But i will say $2k is not enough in your Emergency Fund especially as a single parent. It should be at least 3 months of your expenses and it sounds like your expenses are more than 2k per month. 3 months minimal; 6 months is better. Sometimes more than 6 if you need extra security.

Sounds like you have a good income and are living within your means for the most part so you don't feel the pressure to get rid of the debt completely, budget monthly for sinking funds, and save for a 'rainy day'. Those of us on the other side see it and are trying to get you there.

Best of luck!

Trish

 

[msmama]

I know what you're saying OP.

I budget 1/12 of several things every month - from schooling to insurance, to utilities, etc.

But when the bills come due, I pay them in full, even if, technically, I haven't saved enough yet. (Oil is a good example. I pay the oil bill when they fill up the tank regardless of how much I've "saved.")

Luckily for me, I do have a fully stocked emergency fund and plentiful savings that it always works out. There are months that I can "borrow" from school $ to pay utilities, you know.

So, on paper, every $ is accounted for, but in reality it doesn't always go to that thing in that particular month. Does that make sense?

I guess what I'm saying is that I try but at the same time I deal with reality.

 

[Mickey'snewestfan]

But Dave would say to not send your children to camp as your financial stability is more important than their camp experience.

I have been doing a somewhat modified Dave Ramsey for a while. Set up a budget, working on the credit cards, etc. But I am putting money towards the credit cards, as well as into savings (he would say pay the minimum on credit cards and stash the rest away into savings - whatever is budgeted).

To me, a child going to camp and family vacations are just as important as reducing debt. And if you gain a bit of debt building those experiences, but can pay off the debt, then go for it! Memories are important!

I'm pretty sure that Dave says childcare is a 4 walls experience.

I'm a working mom. My choices seem to be 1) Quit my job (Dave would say no) 2) Send my kid to day camp in the summer and 3) Have CPS show up at my door.

Camp can be a total luxury, if you have a SAH parent or an available grandma, or a partial luxury if you choose one that costs more than the minimum. But in this case we're talking about camp as a childcare expense.

 

[ZehnJahren]

But i will say $2k is not enough in your Emergency Fund especially as a single parent. It should be at least 3 months of your expenses and it sounds like your expenses are more than 2k per month. 3 months minimal; 6 months is better. Sometimes more than 6 if you need extra security.

Agree! I am a single person with no children, and DBF (we live together and share expenses) has a good job. Both of us are young and in pretty good health (I just had an unexpected surgery), but I have over $3k in my emergency fund, with a goal of almost $4k. Three months of expenses for me is right over $3500, so I want that amount, plus some. Further, I have a "fun savings" that I also put money into, so that I can afford fun stuff or trips. My emergency fund never gets touched, but the fun savings is taken out of and built back up all the time - right before my surgery, we bought a big plasma big screen tv for the bedroom, and I paid cash out of fun savings. If I can't pay cash, I don't buy it!

$2k can be gone in an instant - I don't even entirely feel comfortable with such a small emergency fund for myself, and I don't have any kids to worry about! Think about growing that emergency fund, if you can.

 

[rnorwo1]

I think the pp's covered the financial benefits of the sinking fund, but I'll add the psychological (which also affects the financial.)

We used the pay- as- you- go method for years, with our excess cash each month also. We've never, ever had to pay interest on a credit card or anything in our entire marriage (13 years), so we've been successful with living within our means, but still we always "felt" behind financially. Even though we had the money to cover an unexpected (car repair) or expected expense(summer daycare programs, christmas, vacations), it always made us feel like we could never benefit, either with fun items or activities or savings, from our monthly excess. Just like you said, every single month it was something that would come up, expected or not.

We use YNAB now, and have all of these different virtual accounts (all the money is in one account that is earning 5% interest, but YNAB tells me how much I have in the Christmas "account", Vacation account, etc...) So now when a car repair comes up, I don't feel robbed, because I can just go to that particular line item in the budget. The car repair is what I intended to use the money for all along, so it just feels better than taking it from a general account that isn't named.

Also, because I am "spending" (on paper) most of this money, I find we don't "bleed" extra money... even though we're very responsible people financially, bleeding still just happened every month. Now I find it so much easier to save even more, and it all feels so much better than depleting that extra each month.

So technically I am doing it the same way as you, I'm using one account, but using that spreadsheet and naming it, just prevents me from being depressed about parting with so much money at once. So I suggest that you do whatever feels right to you... you probably wouldn't be able to start right away with the sinking funds as things are probably due now, but I would encourage you to give it a try and see if it doesn't free you a bit psychologically.... the better you feel about your money, the better able you will be to manage it exactly how you would like.

 

[tinker&belle]

OP-

We do a mix of both types you are talking about. Our biggest expenses (Christmas and vacation) are pulled out monthly. Other variable expenses (trash gets paid every three months, license plates once a year, HOA fee once a year, Mother's Day, etc.) are built into the 'cashflow' part of the budget.

We tried to cashflow Christmas last year and never again. I felt I had to pinch every penny. We don't usually save an outlandish amount (around $1200 typically) but since we didn't have the money saved up it felt different and I didn't like it. I also felt like we lost momentum that way, whereas the $100 that is pulled from our account monthly doesn't hurt as much.