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

08 Mar 2021 - Contact Sayan Sircar
5 mins read

Save money monthly for large known expenses via a sinking fund

Saving money

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

Table of Contents

What are periodic expenses?

These are known expenses that are usually mandatory (insurance payments) but a few of them can be discretionary as well (like mobile phone replacement). The key here is that the expense is periodic at a frequency lower than once a month. Monthly periodic expenses like rent, mobile/Netflix bill, EMI etc. come from monthly salary.

Periodic expenses can be once a quarter, once every six months, annual or once every 2-3 years. Even some longer-term expenses can be periodic 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

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; annual amounts like insurance payments can be directly added; quarterly things like building maintenance can be made 4 times to make it annual.

  3. Now take the total annual figure and divide it 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

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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.

This 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 arrived 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 not important as the amount you will be saving will be a lot 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 markets suddenly go down.

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

What are the benefits of saving like this?

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

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

Third, you can align purchases with sales/offers/discounts and get the best deals. 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 can pay the whole amount upfront.

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