Many people know the advice to have some kind of emergency fund to cover unexpected expenses or loss of income (and some even follow it!). But few people I know have sinking funds—money set aside for the certain and eventual replacement of many things they own, cars and home maintenance being the biggest for most people. These expenses can cause significant stress if you’re not prepared for them.
The Financial Stress of Homeownership
I owned an old home in Webster Groves for 12 years, and for many years this happened to me. With Murphy’s law, home repairs would often happen close together and end up causing stress. Like one month when my hot water heater, dishwasher, and refrigerator all broke. I had an emergency fund, thankfully, but I hadn’t budgeted for things that, in hindsight, had a limited shelf life. So even though I had the money, I depleted part of my emergency fund, putting myself at risk if a real unknown were to happen. It caused me stress for the next several months as I worked to rebuild that fund.
I finally built in a budget of about 5% of the home value for ongoing expenses, and that saved me a considerable amount of stress moving forward. One year alone I paid $4,500 just to have a giant dead oak tree removed. Because of my sinking fund, I didn’t have to stress too much over that huge expense.
Sinking funds reduce financial stress by providing a cushion for upcoming maintenance, repairs, and replacements that will eventually happen.
Getting Started with Sinking Funds
When you buy a building or piece of equipment for business, the IRS lets you depreciate that item to help set aside money to repair or replace it. But for personal property, you don’t get the depreciation. It’s up to you to establish a budget to replace the things you own. Every appliance has a fairly predictable life. So do your phones, computers, tires, roof, carpet, and even the paint on your walls. You don’t have to obsess on having individual accounts for each thing, but if you set aside some percentage of the total value of your belongings, that would be a good start.
Remember to set aside money for predictable maintenance and repairs. This can save you a significant amount of stress, and also prevent you from having to dip into other areas of your budget when “unexpected” repairs come up.