Sink funds, not budgets! Unfortunately, your paycheck doesn’t just get bigger when you have a big expense due. You have to make the plan (aka the budget) to prepare for those months when your expenses might be bigger than your income. Sinking funds are a way to strategically put aside money in your budget for larger expected and unexpected costs. A common example is Christmas Gifts. We all know that Christmas is December 25 so no one should be surprised when December rolls around and suddenly we are spending more on Amazon than the typical month. A sinking fund makes sure these types of expenses have a place in our budget year-round. Sinking funds make sure your budget isn’t thrown for a loop and you feel prepared when those funds become due.

Why should you have sinking funds and not just savings?

Remember, a budget is what gives you permission to spend. If you just have a lump savings budget, there is nothing stopping you from spending it all on a luxe vacation even though your car insurance is due the very next month. A sinking fund will set up a protective dotted line that makes sure you spend on needs and wants accordingly. They should eliminate stress for large expenses and keep fun-spending fun.

How do sinking funds work?

Let’s use our example of a Christmas sinking fund and say we are starting our budget in January. Our goal is to have $2,000 set aside by November (when we start shopping). So, January – November = 11 Months. $2,000/11= $182 (rounded). In your budget, you are going to want to put aside $182 every month until you’re ready to shop in November.

What are some typical sinking funds?

Sinking funds come in different packages ranging from wants to needs and expected to not-so-expected. Here are some typical items you might want to work into your budget.

• Auto Maintenance
• Home Maintenance
• Medical Fund (Not to be confused with your Emergency Fund. Think of this as known upcoming costs like contacts, new glasses, braces, etc. Some people have this already created in the form of an FSA or HSA)
• Car Insurance
• Home/Renters Insurance
• Utilities (those pesky ones that are due every quarter or saving up for summer when the AC will be on overtime)
• Christmas/Holiday Gifts
• Birthday Gifts & Parties
• Pet Insurance & Medical
• Technology Replacement (new phones or computers)
• Yearly Subscriptions
• School (tuition, books, back-to-school supplies, and clothes)
• Kids (new baby, sports, clubs, classes, camp)
• Vacation (yay!)
• Taxes (April 15th)
• Bonus: Weddings! (Yours or others! Being a guest is expensive sometimes.)

Storing Sinking Funds

Sinking funds need to be in accounts that are readily accessible, unlike your Emergency Fund which should be a little harder to get to in a high-yield savings account. You can opt to create additional checking or savings accounts to help section off sums of money, but I recommend building your will power and budgeting expertise with most of the smaller funds. You should always be referencing your budget first for permission to spend, not your bank account. Download the Habitual Heary Zero-Based Budget Template and get started today. Alternatively, if you already feel comfortable with zero-based budgeting, I recommend YNAB for a great budget and sinking fund tracking app.

If you have any goals that require money (millennial trying to own a home over here!), you need a budget. If you have an income, you need a budget. If you have a bank account or a credit card, you need a budget. I firmly believe that everyone needs a budget, but I also believe that a budget does not control you. You control the budget and being in control should make you feel pretty dang good.

So what is a zero-based budget?

Income – Expense = 0

Simply put, when the money you bring in minus the money that goes out is equal to 0, that is a zero-based budget. At first that might sound terrible. “What? No money left at the end of the month?” you might say. However, I would say “All money was well spent.”

A zero-based budget is an intentional method of budgeting where all your money has a job to do. Jobs come in the form of paying the bills and buying groceries to fun jobs like date night and dog toys. Some of the most impactful jobs are debts and savings. These jobs attack what is weighing you down and prioritize building wealth. It gives you a plan and permission to spend money how you want to.

How does it work?

Again, the goal is to have all the money coming in – all the money going out = 0. There are five steps to getting there.

1. Income. List all your sources of income. Some incomes you might know exactly how much is coming in and some you might have to estimate based on your job type. Err on the side of caution if you are unsure.
2. Expenses. 
   • Required Expenses. Required expenses should be the things you can’t live without. For most people that is food, rent/mortgage, utilities, transportation, and basic clothing. I like to have the required expenses at the top of my budget for 2 reasons. First, if anything should happen to our income, it’s easy to see what we need to fund first and where we can cut from our budget. Second, you take the sum of your required expenses and multiply it by six months to get a comfortable emergency fund goal.
   • Other Monthly Expenses. Think subscriptions, eating out, entertainment, gyms, etc.
3. Goals.
   • Savings. Savings goals should be the bigger things like emergency funds, down payments, new cars or college.
   • Sinking Funds. I’m not exactly sure where sinking funds got their name, but I like to think of these as things that would sink your budget if you didn’t plan for them. They are things you know are coming, but often creep up on you like Christmas/Holidays/Birthdays, car registration and insurance, back-to-school, etc. For this group, take your savings goal and divide it by how many months until payment is due. Example: Start saving for the Holidays in January (Goal $1000/12= $84/month). It feels great to know you have the money on hand for any occasion. 
   • Debts. Just ew. But it’s going to feel so good to say goodbye to these.
4. Get this all to equal 0! This is the balancing part of the budget. If your budget is in the negative, you need to either find places to cut back or bring in more income. If your budget it positive, you need to find more jobs for that money.
5. Invest in the habit. It takes about three months to really get comfortable with a budget and have it working for you. There is trial and error in making a budget and it requires that you check in with honesty, but I think that is worth all your financial dreams coming true.

Tips on Getting Started

Let’s get pen to paper, or more realistically, keys to keyboard! There are a couple tools I recommend to get you started on the right foot. Get them in this order:

• Mint – This is a free tool from Intuit (makers of TurboTax and Quickbooks). They know a few things about finance so this is a great place to start. While this is not a zero-based budget platform, this is going to help you get honest and familiar with your spending habits as it automatically tracks and categorizes spending.
• Habitual Heart Zero-Based Budget Template! – You do not have to be an Excel wizard to enjoy the features I built into this template. It helps you create that zero balance, highlights overspending and keeps you on top of all your categories mentioned above. It also works on Google Sheets if you don’t have Excel. Give it a “favorite” on Etsy for a special 75% discount email. Just tap the little heart.
• You Need a Budget (YNAB) – When you are a zero-based budget master you can graduate to YNAB. This is a super powerful budgeting tool that comes at the price of $84/year. Try 34-days free with my link and see how it will pay for itself. They have cleverly built a huge community around the tool and like-minded budgeters that is as helpful as it is motivating.