I Hated My Budget Until I Did THIS

Read time: 5 minutes

“This is ridiculous! YOU’RE being ridiculous!”

My wife and I stormed off to separate rooms.

We’d just had another fight, and we both needed some space.

For the first few months of our marriage we’d been following a strict budget.

Our spreadsheet was polished.

Our cash envelopes were laid out in crisp rows.

Every dollar of income had been given an assignment.

It was perfect.

Except (obviously), it wasn’t.

Every month we’d agree to what our spending would be, and every month something would come up that would ruin our perfect plans.

Last month I had a fender bender that surprised us with a $600 bill.

Today we were arguing about travel costs to visit family.

Our bank account was stressed, we were stressed, and budgeting seemed to lead to more fights than ever.

I thought this was supposed to be helpful?

Then one day I learned a concept that changed how we budgeted forever.

It instantly became one of my favorite financial tools and one of the top 5 pieces of advice I give to everyone.

And it made our monthly money fights disappear overnight.

In today’s issue:

• Why budgets are broken without this one tool

• How to set up your own stress-free money management system

Forwarded this email? Subscribe here

The Fender Bender Problem

Let me ask you a question - when is the best time to budget for a $600 fender bender?

In an ideal world, you’d get an email before the month begins warning you that you were going to fail to check your blind spot on April 18th, giving you plenty of time to plan for that expense.

But, unfortunately, that service doesn’t exist yet. Or if it does, no one’s told me about it.

So we’re stuck paying for that accident after it’s already happened.

Cue the stress.

Let’s look at another problem - Christmas.

Christmas is a time for family, hot cocoa, ugly sweaters, and racking up thousands of dollars of credit card debt.

Last year, the average American took on $1500 of debt just for Christmas alone!

(Nothing says Ho Ho Ho like monthly payments.)

The trouble is, most of our budgets are pretty tight already.

So when December rolls around and we want to show our love to others by gifting Red Ryder BB guns to all our nieces and nephews, we’re forced to put those charges on a credit card and figure things out in January.

Oil changes, back-to-school supplies, broken cell phones, trips to Aruba…

Our monthly budgets are not good at handling all of the random one-time expenses that life throws our way.

The Sinking Fund Solution

The core problem is that our income and our budgets usually follow a predictable, monthly schedule.

But at least ¼ of our expenses happen randomly. 

They pop into your life at the worst times. Like when you decide to quickly sneak into WalMart in your spiderman pajama pants, and run into someone you know while shopping.

So how can we turn these random expenses into regular, monthly ones?

Enter, the Sinking Fund.

A Sinking Fund is the name we give to a savings account with a very specific purpose.

Remember that $1500 of Christmas debt the average American is racking up each year? 

What if we planned for Christmas starting in January, and every month we set aside 1/12th of the money we’ll need for gifts and eggnog into this special account?

Now that $1500 one-time expense has become 12 small $125 expenses that you can easily add to your budget.

And when the holidays come along, you can open up your full Christmas Sinking Fund and make everyone’s Christmas dreams come true, guilt free.

Boom.

Want to take a vacation next year?

Sinking fund.

Thinking of moving?

Sinking fund.

Want to stock up on tubs of cheese curls when Costco runs their July sale every year?

Odd, but sure, sinking fund.

And we don’t have to stop with expenses that happen every year.

If you think your current car will probably last you another 5 years, you can start paying yourself a car payment into a New Car Sinking Fund so when the time comes to buy, you can get your next car in cash.

A $10,000 car purchase in 5 years = $10,000 / 5 years / 12 months = $167/month

Did I just hear you break out into applause?

And the final way to leverage this amazing tool is for expenses that you know are coming, you just can’t predict when.

These are things like your car’s transmission going out or the furnace breaking at your house.

You don’t know exactly what will happen or when, but you know that if you live long enough, you’ll run into some maintenance issues.

Instead of letting them destroy our budgets when they show their rotten little faces, we can prepare for them by turning them into smaller line items in our monthly budget.

One car maintenance sinking fund and a house maintenance fund later, and you’re basically unshakeable.

How to get set up

Setting up your own Sinking Fund collection is really easy.

First, you’ll want to find a bank that allows you to open many savings accounts.

My personal favorite right now is Ally Bank, but more and more banks are offering this feature.

Just make sure there are no fees or minimum balance requirements on the accounts.

Secondly, think through which Sinking Funds might work well for you.

Once you have that list, then write down how often you’ll need to use the money and how much an expense will typically be.

Christmas is a yearly thing, so that might be $600 every 12 months.

Divide $600 by 12, and you’ll want to transfer $50 per month into that Sinking Fund.

Home repairs might only happen every 2-3 years, but they can be VERY expensive when they happen.

A good rule of thumb is to budget 1% of the home’s value per year for maintenance.

So for a $400,000 house, expect to spend around $4000 per year maintaining it.

Some years that number may be zero, others it may be $12,000, but a Sinking Fund will help you be ready for whatever the year brings.

$4,000 / 12 months = $333/month

Keep doing this until you know how much you want to transfer monthly into each account.

Lastly, open up savings accounts for each category, give them a nickname, and set up an automatic monthly transfer to fund those accounts the moment you get paid.

Now you are ready for life’s random expenses, and you never have to think about them again.

It has been over a decade since I’ve worried about paying for a car repair, and the only thing we discuss when booking travel to visit family these days is how long to stay.

Keep growing,

What money concept would you like to learn more about next? Hit reply to this email and let me know!

Forwarded this email? Subscribe here