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Budget 101: How to save for periodic expenses: the sinking fund

Save money monthly for significant known expenses via a sinking fund.

Budget 101: How to save for periodic expenses: the sinking fund


Posted on 08 Mar 2021
Author: Sayan Sircar
5 mins read

Save money monthly for significant known expenses via a sinking fund.

Budget 101: How to save for periodic expenses: the sinking fund

Read on to find out how to manage such periodic expenses.

📚 Topics covered:

What are periodic expenses?

These are known expenses that are usually mandatory (insurance payments). Still, some can also be discretionary (like mobile phone replacement). The key here is that the expense is periodic at a frequency lower than once a month. Recurring monthly expenditures like rent, mobile/Netflix bill, EMI etc., come from monthly salary.

Periodic expenses can be once a quarter, every six months, annually or every 2-3 years. Even some longer-term payments can be recurring as explained below. Some typical examples:

  • < Annual: ULIP payments, building maintenance, some school fees, hobby fees
  • Annual: Insurance payments, Festival trips, annual family trips Once every 2-3 years: gadget and white goods replacements (fridge, TV, washing machine, AC, mobile, tablet, laptop etc.)
  • Longer-term: >3 but <7-8: next car after selling the current car, recurring foreign vacation etc.

Benefits of a sinking fund

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How to save for periodic expenses?

  1. Take a piece of paper (or Excel / free Google Sheets) and write down every periodic expense using the examples above.

  2. Convert them into annual values and add them up. For example, 3 lakhs of foreign vacation every 2 years is 1.5 lakhs a year; you can directly add annual amounts like insurance payments; you can make quarterly things like building maintenance 4 times to make it annual.

  3. Now, divide the total annual figure by 12 to get the monthly amount you need to save from your salary every month.

Even one-time purchases (first car in 3 years etc.) can come under this, where you consider the total amount you need, divide it by the number of months you have and add that to your monthly sinking fund contribution. Over time, as expenses change, revisit the calculation to adjust the monthly figure.

How to calculate sinking fund contribution

Where to save for periodic expenses?

Wikipedia: A sinking fund is a fund established by an economic entity by setting aside revenue over some time to fund a future capital expense.

A sinking fund is an account where you save money monthly that is entirely different from your long-term goals (retirement, child education etc.) and your emergency fund (for job loss, car trouble, medical emergency etc.) Use the figure from step 3 above and open a SIP in a liquid fund. If mutual funds do not work for you, just put them in a separate saving account dedicated to this. Interest in the savings account is unimportant as the amount you will be saving will be much less than your total wealth. Keep things simple. This account or mutual fund folio is the sinking fund. However, do not invest this money in the stock market since you need it soon and cannot lose any of it if stock markets suddenly go down.

When payment comes, make it from a credit card (for points) if possible or from a general savings account. Refill the savings account or pay the credit card bill by redeeming it from your sinking fund. Keep a watch on the sinking fund to ensure that you do not overdraw (buy a ₹30,000 phone while you had budgeted for ₹20,000) to ensure the fund always has enough money for what you need.

What are the benefits of saving like this?

First, the money you need is always available for things you need to buy/spend money on.

Second, your monthly expenses are predictable and not sudden. Without a sinking fund, a high cost, like insurance payment, makes a sudden dent in the monthly budget. You may need to resort to a credit card. However, the interest costs are prohibitive unless you pay it off entirely by the next cycle.

Third, you can align purchases with sales/offers/discounts and get the best deals. For example, if you purchase a mobile every 2 years, align that with the right sale, which has the best offers and buy then. You may also get the best offers if you pay the whole amount upfront.

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Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

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This post titled Budget 101: How to save for periodic expenses: the sinking fund first appeared on 08 Mar 2021 at https://arthgyaan.com


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