FPU: Sink your debt with a Sinking Fund


Hi Everyone –

We hope you are all having a great week!   Did you get a chance to make your budget??  Remember it is a work in progress.  You may need to tweak your budget for a few weeks or even a few months until you find what works for you.  This week we thought we would expand a bit on our sinking funds and how we organize our finances.  It is very important to know where your money is and where you need it to go.  A sinking fund is kind-of like a lay-away account where you sock away a little money each week to pay something that month, (or year, etc.)    In addition to your budget, this micro-planning and saving for future monthly, quarterly, biannual and annual expenses will keep you on track to debt-freedom.  We do this by maintaining two checking accounts we utilize to organize our funds.

1.  Household Account – This is the account we initially put all of our weekly income into and pay out all our expenses for that week. This is simply an in-out account and we maintain a very low balance here throughout the week.  After our our weekly budget meeting today, we have $ 7.83 in our household account.  This account is very close to zero based budgeted….we leave very little unaccounted.  

2.  Freedom Account – This account is absolutely VITAL to our success.   This is a holding account, (or sinking funds or “layaway account”) for our funds that must be earmarked for future expenses that we know are going to come due eventually.   We maintain a spreadsheet naming every dollar in this account and fully funding every expense we have or will have.  The funds in this account come from 2 main sources.  1) We move funds from our household account into this account when naming all our dollars at the end of our weekly budget meeting.  2) The other source of these funds is our tax return, which we due tend to receive a good size refund each year because we both claim single-zero for the year..  While Dave Ramsey would not advise this, it works beautifully for us and has kept us on-track and ready for even the largest expenses. It also actually forces us to live below our means, (which is what people with debt REALLY have to do! This. Way. Works. It is the most iron clad way to save our money and not spend it!) 

 The following is a list of the categories or line items in which we have earmarked funds in our freedom account.  

Emergency Fund – we maintain $2,000 to assist us in an emergency so we aren’t tempted to use a credit card.  This is for *real emergencies like car or home repairs. Funded as much as possible with weekly pay and if not at 2000 come tax return time, it will be put back there with tax return money.

House Payment- we save 1/4 of our house payment each week to fully fund our mortgage before it is due each month.  It is easier to come up with a little each week than to come up with the full amount when it is due…and a lot less painful. This is funded with weekly pay.

Tuition – we save 1/4 of our son’s elementary school tuition each week to fully fund by the due date each month. This is funded with weekly pay. While tuition is not a large expense, it comes due at a time of the month when a number of other things are also due.  Having this item saved in advance helps us to meet all our obligations during that time of the month.   

Snow Ball – once we have funded our weekly amount due into the house payment and tuition, the rest goes into the snowball.   We collect all extra funds and when our credit card comes due, we pay everything in this line item onto this bill.  

Car Insurance –  We pay our car insurance twice a year to receive a discount.   Every 6 months we are prepared to make our payment.  This ended our days of being surprised that the car insurance was due again! This is fully funded with tax return money.

Christmas – we finally have figured out that Christmas will happen every year.   We agree upon an amount we will spend on Christmas food and gifts.  The agreed upon amount is moved into the Freedom account from our tax return.  We have enjoyed a cash only Christmas for the last few years.   What a relief! (and fully funded way back in March with tax return money.)

City of WBL – this is another of those bills that can sneak up on you since it is only due every 3 months.  We set aside enough funds to cover a years worth of this bill from our tax return.  We are never surprised and this item is always fully funded.

Camp – Tommy will be going to camp this year, which we set aside funds from our tax return to cover this expense. 

School Fundraiser – Each year our son’s school has a fund raiser – we set aside a set amount each year to purchase a table at this event and to donate to a cause very dear to our heart, the Christian education of children. 

Our Freedom Account is what Dave Ramsey would call our sinking fund.  A sinking fund is simply a financial strategy that will make a huge difference in your life!   Sinking funds are reserve funds set aside for a specific purpose. If you can set up a spreadsheet with every expense you will be paying over the year, track your saving for each of those expenses in advance and deposit that money into your Freedom Account you will avoid the gotcha’s of irregular expenses.  Back-to-school time, Christmas shopping and Summer getaways are no longer capable of derailing your budget  (…and Yes, if your sinking funds are funded and you’ve saved a little cash for a hotel or campground stay, you CAN occasionally go!) Oh, and back-to-school, Christmas, birthdays and mini-vacation are never an emergency, right?

Since we are still working on paying off debt our sinking fund is limited to monthly and annual bills for the most part.  Once we are debt free these categories will be more fun and include new furniture and vacations…..until then, we limit our sinking fund to annual, quarterly or monthly bills.  Trust me, we frequently dream of that vacation and how great it will feel once we are debt free.   Only 2 years, five months and 2 weeks……but who’s counting!

Wishing you all a wonderful week!


Paul and Jen
Joyfully Living Below Our Means!



Other Articles in our FPU Series:
Financial Peace University
Our FPU Story: That was then…..This is now
FPU: Leap of Faith
Budgeting…Time to Make a Plan
FPU: Inside Our Weekly Budget Meeting



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