I recently celebrated a birthday. Our local tax assessor didn’t send me a birthday card, though. He sent me a bill for our car tag renewal. Fortunately, last year I began saving a little bit from each paycheck into a dedicated savings account for this very purpose.
It was nice to move the money from savings to checking and send the tax man a check without affecting our monthly cash flow. A few years ago, I probably would have been cashing a credit card convenience check to raise the cash to pay the bill.
This is the third or fourth annual (or semi-annual) bill we’ve managed to save for using sinking funds. Here’s the strategy we use:
How to Set up a Sinking Fund
1. Open a dedicated savings account at your local bank (or online bank) or credit union. 2. Determine the item(s) for which you wish to save for all year long. 3. Divide the annual expense by the number of paychecks you plan to receive before the next bill is due. For instance, a $500 annual expense would work out to about $20 per paycheck since I am paid 26 times a year.
4. Automate the process by establishing an automatic transfer from your primary checking account to your sinking fund savings account. If your bank doesn’t allow this, contact your payroll office and have the amount siphoned from each paycheck.