I hear the beep go off in my ear and I hear the notification that I have been selected to answer this customers call. When this happened I worked for a high street bank collecting on debt, in particular mortgage debt.
It was not unusual for people to call into the call centre in advance of a situation and notify us that they just would not be able to meet their upcoming payments for a few months. This time the call that had come through was someone that could not meet their payments for their mortgage over the coming months.
As is proceedure we have to delve a little deeper as to why they cannot make the payments. After all, your mortgage is a priority debt, in fact it is the first thing that you should pay! So when someone says that they cannot make a payment to their mortgage then it is a serious thing.
Customer: "Hi, I am calling to let you know that I won't be able to make my mortgage payments for the next couple of months."
Me: "Oh, sorry about that. Let's see what it is that we can do. Can I ask why it is that you won't be able to make your payments?"
C: "It is Christmas next months and I need to buy some presents."
I had to take a moment. Was I hearing this right? This person was calling me up to tell me that they wanted to buy Christmas presents instead of making sure that their mortgage was up to date?
M: "Unfortunately we would not be in a position to suspend your payments for you to buy presents."
C: "Well I just won't pay it then ..."
M: "That is your decision, but do keep in mind that it will impact your credit report and the payment will still be due."
At some point here some customers would rant about how we are ruining their children's Christmas, how it is all our fault that they do not have the money thanks to the financial crash, and so on. But the shocking thing is that these kinds of calls were not unusual. People would call in frequently requesting a payment holiday from their mortgage to buy Christmas presents, go on holiday, save up for a car, and so on. On occasion, after the call and a month later the customers name would pop up again as we were making calls and I would have to call them to chase the payment that they did not pay.
The thing that shocked me the most, is that these things should come as no surprise to people. For as long as I have been alive, Christmas has always fallen on December 25th. I have checked with family, friends, and the internet and can confirm that even before I was born it has been on December 25th. How can someone suddenly forget that Christmas presents need to be purchased? They have had all year to prepare for this!
If you know that something is coming up, then why do people not save for it? Some do not do it because they do not know how to, so let me tell you and show you the wonders of a sinking fund.
What Is A Sinking Fund?
A sinking fund is a form of savings. It is a pot of money that is marked for a particular activity or purchase. As and when it is used the balance will go down but is topped back up again over time.
People use sinking funds for all kinds of things, but most popular is car maintenance, home repairs, medical costs, car purchase, Christmas presents, and birthday presents, to name a few.
You can literally make one for anything, I have one set up for my personal development. I have money go aside each month that I can use for books, courses, audio programmes .. EVERYTHING! Sometimes I do not use any in a month, other times I blow it all on a course. But that is what the money is there for.
How To Work Out How Much To Put Into The Sinking Fund.
So this can be pretty daunting for a lot of people, but it is pretty simple. As we have established that the sinking fund is ear marked for a particular event then we should know that we have an end goal in mind.
Let's use the example of Christmas presents so that we can see how the customer from the phone call could have prepared and made their mortgage payment.
As we know that Christmas Day is on December 25th we have the end date in mind. We also know that we want to buy the presents before Christmas Day because there are no stores open on that day. So for arguments sake, we shall say that we want to go and buy the presents on December 1st.
Right we have our goal date. We know we want the savings to be topped out by the day that we go shopping. What we have to do now is decide how much we want to go shopping with. Now it can be tricky because you have to place a future value onto something that you do not know what will be, but what we have to do is say a maximum that we are willing to spend. If Christmas is your thing and you love spending money on gifts for people at that time then you say okay I will spend £XXXX.
If it were me that was doing this, I would say that I would spend about £50 per person each year. I feel that I can get a very decent present for someone with £50. Maybe a selection of presents. If there are 10 people that I need to buy for then that would be a £500 total for me.
Some people may want more than £50 and some may want less, but if we use the average of £50 we will know that we have enough to spend.
My parents did this with me and my sisters, and so did my grandparents. They would tell us that we have £300 to spend on whatever we want. They knew how much they would be willing to spend on us, so we can do the same.
Working It Out
Now we know how much we are willing to spend in total we have to work out how to save that money. In this example we will say that we realised that on March 1st we really needed to think about Christmas again. The smarter people would have thought on December 26th that they need to start thinking about Christmas next year!
Right, from March to November that gives us a total of seven months. We also know that we have a target of £500 to spend. Here is the maths:
£500 ÷ 7 = £71.43 (rounded up)
That means we have to put aside £71.43 a month for 7 months to reach our target of £500 in time for shopping.
That isn't all that much money. That is a TV package a month. If you smoke, it is about 6 packs of cigarets a month. If you drink that would be about 21 pints (or 15-ish if you live in London) a month.
Everyone could work out how to save that much money. Or if you like your lifestyle and do not want to make sacrifices then you can work out a way to make an extra £80 a month. I am sure that there is a ton of stuff lying around your house, or that of a friend or family that is not used and that you can sell on eBay or Facebook Marketplace.
Now, what if we had thought about it in January rather than March?
£500 ÷ 11 = £45.46 (rounded up)
A difference of £25.97!
The more time that you give yourself then the less money you are going to have to put aside each month.
The Larger Stuff
Sinking funds are also used to set aside money for larger ticket items such as a car purchase, after all a car changes owners on average every 3-4 years. If they are buying a mid prices car that would be somewhere in the region of £6,000 to £10,000 a time.
If someone wanted to buy a £6,000 car every 4 years they would need to set aside around £100 a month into a car sinking fund.
The same would go for a holiday. If you wanted to go on a holiday costing around £5,000 every 12 months, you would have to put aside £417 a month to meet that.
The Rolling Sinking Funds
I have mentioned about date and goal specific but you can have some that just keep rolling.
Just like my education and personal development one, I do not have an end amount in mind for that, I just stockpile money in that account/pot and use it when I feel the need to.
Once you have used it, as it is a rolling fund, you just keep putting money into it and using it as and when. Your balance will go up and down, but if that is going to be the best thing to do and the easiest way to do it then do it.
A good example of a fund like this would be a car maintenance fund, because you never know when you are going to need to use some of the money for something.
Where To Put The Sinking Fund
You have a couple of options available to yourself here.
The first option is one that a lot of people do. Majority of people that have sinking funds set up an easy access savings/current account for each fund that they want to set up, they will then set up a standing order each month for the money that they are putting into them.
In recent times the first option has become easier today with the advance of FinTech banks such as Starling and Monzo having the option to set up 'pots' where you can put money aside.
The second option is to use a single account and then make a note of how much money is in there for each category. This can get confusing at times and requires more admin as you have to make sure that the records are up to date and accurate. The best method to make a note would be to have a detailed Excel sheet but there is nothing stopping you from having a running total on your notes app on your phone or even in a note book.
Clearly having a separate account for each makes sure that the money is not mixed up and you overspend in one category when you do not have the money there and is why it is the preferred method for those that use sinking funds in their financial plan.
You see a sinking fund gives you a little extra buffer between you and life. To save you using your emergency fund, going into debt, or stopping our mortgage payments. You can just use your sinking funds.
We have a sinking fund for house repairs that we put money into every month. At times it has come in handy when we wanted to do little jobs but not wanted to account for it in the budget. We also know that if there was something drastic to go wrong then we can use that money. There might come a time when we realise there is too much money in there for any need and that is when we would stop contributing.
Doing that is fine once you have enough. You can have a little mental shift and say that it isn't a sinking fund anymore but the house maintenance emergency fund.
Having these sinking funds bring peace of mind. They make sure that you are not going to put yourself in a bad financial position by missing your mortgage payments. But the thing is that you have to hold yourself accountable, you have to hold yourself responsible. You have to set the boundaries, if you want to set aside a lot of money in a short period of time but do not have enough then you either need to make more money and put it aside or extend the time frame.
People should not be going into debt to buy presents, go on holiday, get an education, buy a car and more. They should not be putting their credit file, house and family at risk, by missing payments on a mortgage that is what people are doing. They should be setting up sinking funds and being smarter with their money.
Be smarter with your money - Use sinking funds.