Want to know the topic surrounding some of my most asked questions?  Yep, you can probably tell from the title of this post that it’s…

Sinking Funds

No joke.  I get asked weekly what categories should you be saving for, how much should you be putting aside, how to keep them all straight, and what to do when you need them.

I think sinking funds are a win-win for any budget.  I even have a whole post dedicated to teaching you what a sinking fund is.  I think they are vital to a healthy budget and can really help pull you out of a downward spiral.

One of the more recent questions I have been receiving is about how to organize your sinking funds.

Basically, you have a list of sinking funds you need to be saving towards.  You know about how much you should be putting aside each month for them (simply go back through last year’s budget or spending to see how much you spent and find a monthly average).  But what you are confused about is organizing them so when you look at your bank statement you know how much is earmarked for which category.

I get it!  It can be hard to remember what last month’s $200 transfer into your savings account was actually for – car maintenance or vacation?

That’s why you need an organization system that works for you and that’s easy to keep up with. To keep things simple I have one savings account at our local bank nicknamed “Sinking Funds.”  That way all the money gets pulled into the same savings.  Of course you could open a separate savings account for each fund, but that might be a little painful and overwhelming.  So I suggest having one savings account specifically for your sinking funds and then keep track of your amounts outside the bank.

There are several ways to keep track of your sinking funds.  First you can have a spreadsheet in your budget planner, which we did for a while.  But we tend to pull quite a bit each month from different categories and it got hard to keep up with.  Next you can keep a basic Excel spreadsheet on your computer.  It works, but there are so many details you could be missing by doing it that way.

That’s why I prefer to use our sinking funds spreadsheet.  It keeps me organized on how much we need to be saving each month to reach all of our goals and it helps me allocate transfers to specific fund categories.  I’m able to input how much I am transfer into my savings account and then I can easily tell how much is earmarked for all my different categories.

Now when I need to pull money out for car repair, pet bills, or vacations then I know: A) How much is in each category so I’m not overspending and B) What is left after I transfer the money.

Let’s say I need to get a new set of tires for my car that will cost me $250 (I feel that’s pretty low, but you get the idea).  However, I only have $200 in my car maintenance fund.  Then that means I need to either pull $50 out of my checking account or borrow from another sinking fund.  More than likely I’m going to borrow from another category to help cover the costs (now you could borrow from your emergency fund, but I hate to do that for something that isn’t a true emergency – most of us know that our tires will need to be replaced and try to be prepared for it.).

In the spreadsheet I subtract $200 from my car maintenance category and then I subtract $50 from somewhere else, let’s say vacation.  Now my car maintenance fund balance is $0 and my vacation fund balance is $50 less.  No more guessing where the money came from and how much I should have left.  It’s right there, on the screen and it’s automatically calculated for me.

What else is nice about having a sinking funds spreadsheet is it will help me stay on track to reach my goals.  I put extra money in each month or take out some then I can recalculate how much I should be saving, which means I know exactly where to put my money and allocate to hit my sinking funds goals.

If you’re ready to take control of your sinking funds and stop the chaos then join me.  I’m launching (again) my Sinking Funds Spreadsheet out into the world.  I did this earlier this year and received amazing feedback from so many of you.  So I thought it was time to share it again.  Right now you can grab your Sinking Funds Spreadsheet for 25% off using the code SINKING at checkout.  Now there’s a catch though, this discount is only good for a limited time.

Need more help with your budgeting?  No problem.  You can easily download the CFO Bundle template to help you keep track of all. the. things. I know budgeting can be overwhelming.  Inside the Chief Financial Officer Bundle you’ll able to set a budget for the entire year in a few easy steps.  Plus, you’ll be able to track your spending in such a way that the spreadsheet will automatically calculate your totals for you.  A bonus piece? The Sinking Funds Spreadsheet is included inside for FREE.  That’s right!  So get started right now.

When was the last time you looked at your insurance policies?  Probably awhile ago, right?

That’s pretty typical.  We take out a new auto policy, life insurance policy, or health insurance and then we never look at it again.  The insurance companies send us updated policy information and changes a few times each year and those booklets just get filed away to never see the light of day again.

Well that’s a big mistake.  You should be conducting your own insurance review at least once a year.  It’s important to know that insurance policies should be updated from time-to-time as our lives change, our kids get older and out financial situation changes.

The easiest way to get started is to pull the declaration pages for each of your insurance policies – usually these are what the insurance company sends you when you take out a new policy or what they send as they update throughout the year.  The declarations page is a summary of what your policy covers.  What I like to do is open up Microsoft Word and create my own summary page of the most important details for each policy.  I like to include:

• Type of Policy (health, life, home, auto, and so on)
• Insurance Carrier
• Policy Number
• Date Issued
• Coverage Amounts (medical, liability, personal, etc.)
• Annual Premium Amounts
• Insured (who is covered by the benefit)
• Beneficiary (life insurance)

Go through and create a Word document or Excel spreadsheet answering all of the points above for each policy you and your spouse own.  Now it’s time to get into the insurance audit portion.  Once you have your information you need to make sure it’s up-to-date.  Here are a few key questions you need to answer:

1. Have I recently gotten married or divorced?
2. Did I have another child?
3. Do I still own all of these autos?

These will help you determine if any coverage or beneficiaries need to be changed right away.  Next you need to look deeper into each policy.

Auto Policy

Make sure you have a clear idea of what your coverage is by checking the following: liability coverage, bodily injury liability, and property damage liability.  You should know the liability coverage will help cover any expenses when you’re at fault of the accident.  The money will go to  property you  damage, but will not cover the people in your car.

On the other side, the bodily injury liability will cover the medical expenses of people injured in the crash.  Typically these appear as 20/50 or some combination similar to that.  These numbers mean the maximum dollar amount your insurance policy will pay for a single person’s injuries.  For example a 20/50 policy will pay a maximum up to $20,000 for a single person’s injuries and up to $50,000 for the total medical cost of all the injuries.

Property damage is exactly that – it covers any damages to property when you’re at fault.

Other factors you need to consider on your auto policy is areas like uninsured/underinsured motorist coverage, personal injury protection, collision, comprehensive.  Just ask your insurance agent if you are covered and what the cost is for adding them to your policy.

Here’s a breakdown of what they mean:

Uninsured/underinsured – if you are hit by someone without insurance or doesn’t have enough insurance to cover your medical or property damage costs then this part of your policy will kick in.

Collision – This covers repairs to your car.

Comprehensive – If you’re car is stolen or damaged outside of an accident, then it’s covered.

You also need to make sure you have enough coverage that is required by your state.  Now each state is different, which is why I recommend working with an agent in your state of residency.  That doesn’t mean you should have the the bare minimum – no, actually you should have more.  Especially if you have family and are worried about prolonged medical costs if you’re involved in an accident.  If you do not have enough coverage then you’re on the hook for the rest of the costs.

You also need to make sure the coverage you have is enough to meet your umbrella policy (read more about umbrella policies below)

Life Insurance

Do you have a term life insurance policy, universal life, whole life or a hybrid?  It’s recommended that if you don’t have any life insurance to start with a term policy.  They are more cost effective than whole life policies and can provide the coverage you need while you have small children or have considerable debt.  Make sure to add a reminder to your Google calendar or planner before the policy expires so you can look at renewing it, changin it or dropping it.

You need to keep up with your total death benefit.  Make sure you understand how much your beneficiary is going to receive if something should happen to you.  You need to verify the beneficiary.  If you’ve recently been married or divorced then that information might need to be updated.  If you have a Trust or an Estate Plan then you might want to consider naming your Trust as the beneficiary after your spouse.

If you realize you do not have enough coverage to cover your family’s debt, replace your income, and provide for your family’s future then you might need to speak to your insurance agent about increasing your coverage.  As your family gets older and your children are no longer minors then you might be able to lower your death benefit to reduce costs.

Long Term Care

Do you have a long term care policy.  It’s recommended that you start researching and talking with your insurance agent about long term care policies in your 50’s and 60’s.  So put a reminder in your calendar.  Long term care policies are vital to helping you maintain financial independence and not put any strain on your family if you or your spouse she go into a nursing home or need long term care.

For long term care insurance policies make sure you understand the amount the policy will pay ‘per day’ and how long the benefit lasts.  There are hundreds and hundreds of different policies on the market and each one is a little different.  So make sure you understand how your’s works.

Home Owners or Renters

Do you have enough property and casualty insurance coverage?  What happens if someone comes to your house and gets injured, are you covered?  You need to sit down with you insurance agent to make sure your liability coverage, medical and so on limits are high enough.

You also want to make sure you’re covered if you’re in a earthquake zone, a flood plain, or any other area that’s prone to natural disaster.  A lot of policies cover water damage from broken pipes, but not if your home is flooded from a local river.

Umbrella

An umbrella policy is a smart tool to have.  If you get sued, get hurt or someone else gets hurt on your property, your car, your boat, whatever then an umbrella policy helps.  The most important detail about an umbrella policy is to have enough minimum coverage so there is no gap.

For example, you have an home owner’s policy with liability coverage of $200,000.  Your umbrella policy kicks in at $300,000.  Someone comes to your home and gets injured.  They sue you for $900,000.  Your home owner’s policy will pay $200,000, leaving you $700,000 due.  Your umbrella policy won’t kick in until the $300,000 mark, which means you are responsible for $100,000 worth of damages personally.  Then you’re umbrella policy will pay the remaining $600,000.

But you, personally are responsible for $100,000 to this person who got injured.  Do you have $100,000 sitting in an account?  Probably not.

If you’re unsure if your coverage has any gaps, sit down with your insurance agent and ask them.

Health Insurance

Do you know how much your deductible is per year for yourself and for your family?  You need to also understand the maximum out-of-pocket costs you could be liable for.  For example, a policy has a $1,500 deductible for the individual and a $2,500 deductible for the family.  The policy also havs a $5,000 maximum out-of-pocket cost.  That means if you get sick you could be liable up to $1,500 before your insurance kicks in and if anyone else in your family gets sick that amount goes to $2,500.  On top of that, you could have to pay an additional $5,000 (plus the $1,500 or $2,500 deductible) before your insurance will pay 100% of your medical costs.

If you have a high deductible or out-of-pocket cost then you might want to increase your emergency fund – in the above example you would need $7,500 to cover all of your expected contributions before insurance covers 100%.

You could also have a Health Savings Account (HSA) if you have a high deductible plan. Some employers provide them and are great tools to have.

Disability Insurance

You need to know the monthly benefit amount, how long it will pay and when the payment will start.  It’s also important to understand how the insurance company defines a disability.  There are two major types of coverage – own occupation and any occupation.

Own occupation kicks in if you cannot do the activities for the job you have – your own job. Professionals want a policy that will provide coverage for their specific career, which would be own occupation.

Any occupation kicks in if you cannot do the activities for any job – which is a broader term and harder to qualify for.

How much do you have in your emergency fund right now, in this very moment?  Is it the recommended $1,000, more, or less?  Or are you over here shaking your head going “what’s an emergency fund?”

Well if you’re the later one, then I recommend checking out my post from a few years ago that shared why were were so glad to have an emergency fund built up.  Now if you’re someone that has the bare minimum of $1,000 or less in your emergency fund then you might want to consider bumping that amount up.

Now let me start off by saying $1,000 is a great starting point for any emergency fund.  Plus, it’s no easy feat to reach that milestone.  Especially when you have bills, sick kiddos, and life going on.  Because without fail when you finally get there, you will always have something come up – need new tires, your fridge goes out, someone get sick, etc.  So when you reach the $1,000 mark and keep it for a few months then you start to feel pretty darn proud of yourself.

So congratulate yourself on that milestone, because it’s huge!

Now if it’s so hard to reach $1,000 in your emergency fund then why am I suggesting you increase it?  It’s simple – insurance deductibles.

Right now, today if you got into an accident how much would you have to pay your insurance?  $500, $1,000 or more?  What if both you and your spouse gets into separate accidents close to the same time period?  Now you’re paying double the deductible.

For us, having more in our emergency fund came in handy when our son was born.  He was sent to the NICU, so our medical bills were outrageous!  We planned to be better financially prepared for our baby and one of the first steps was bulking up our emergency fund.

How can you quickly increase your emergency fund savings?

Well for us, the quickest way was to stop eating out – we even did a no eating out challenge for a few weeks.  Think about it on average, your family might be spending anywhere from $20-50 a week on eating out.  If you stop for 6 months or at least cut back to only spending $50 a month then you could add $1,000 to your fund.

You could also go through your home to find items you no longer use and sell them. Facebook Swap Shops are popping up everywhere or you can utilize Craigslist to find a buyer for your stuff.  We’ve sold movies, clothes, purses, toys, and so much on Swap Shops.  That money almost always goes straight to our savings account.

If you need more than $1,000, how much should you have?

This is a tough question to answer because every family is different.  I recommend having at least enough to cover the $1,000 minimum plus one person’s health insurance deductible and enough for one auto deductible.  So for our family that would be $3,000 in our emergency fund.  You might be more or less depending on your insurance deductibles.

If you’re pregnant or planning on expanding your family then you might want to include the family deductible instead of the individual.  If you have a teenage driver then you might want to include their auto deductible too.

Now, if you’re someone that doesn’t have the $1,000 in your account then that should be your first focus.  Save your $1,000 then make sure you can keep it for a few months before starting to grow it.  If you have debt and are focused on paying that off, then you need to find other ways to increase your emergency fund balance – that’s why I mentioned the no eating out challenge and selling old items around the house.  You shouldn’t take away from your debt snowball, unless you’ve below the $1,000 minimum.

Need more help to build your emergency fund?

Have you seen the new CFO Bundle?  If you’re needing a little more guidance or are wanting to keep on track with your spending, then check it out.  It’s the perfect addition to your monthly budgeting routine.  It can help you stay on track with your spending, know how much you’re spending and where.  I’ve even included my favorite sinking funds spreadsheet to help you know how much to be saving each month to reach your financial goals.  Check it out over in the shop HERE.

 

Do you have inconsistent income and expenses from month-to-month? Well if you do, and you find yourself struggling with using the traditional budget then switching to the zero-based budgeting could be the answer.

Have you heard of zero-based budgeting before? If not, let me break it down for you.  It’s where you start over, fresh each period.  So it could be the beginning of every month when a new set of expenses are going to be due or before you get paid again.  You basically start from ground zero and build your budget around this month’s needs or the income you have coming in.

For instance, let’s say you have a consistent income because you’re paid on commission.  Now most commission-pay employers work a month behind – meaning you get paid in February for the sales you made in January.  It makes it easier to predict how much your paycheck is going to be because you should be keep track of your sales and commission rates.

Once you have your income amount, then you build your expenses around it.  You first subtract out the necessary items – like rent, food, insurance, etc.  Then you allocate money towards savings and debt.  After those are taken care of you put some money towards retirement and any money leftover goes towards either more debt, more savings, or is play money.

This system works really great for those with inconsistent incomes, if you receive a hefty yearly bonus, or if you have fluctuating expenses – like traveling a lot one month compared to another or you have a variable payment rate on your mortgage or personal loan.

The key to the zero-based budgeting system successfully working is that your income minus expenses should equal zero.  You should have no money leftover at the end of the month.  If you do then that means you should have budgeted more towards your savings or paying down your debt.  You want to make sure each cent of your income has a purpose.

It’s tough to get the hang of it, so it’s expected that you should leave a little wiggle room (I would say about $50) the first few months until you get your system perfected.  But eventually you should end up with a zero leftover from your paycheck.

Here’s how to create your zero-based budget:

FIRST write down your monthly income.  Again if it changes you will want to do this step beginning of each month or before each new pay period.  If you have trouble predicting your income, then start by tracking your sales and commissions.  You can create a simple Excel spreadsheet to track it all.  Then you can start doing the math on your own.

SECOND write down your monthly expenses.  Again, go in order of importance.  Make sure you have a roof over your head and food in the fridge before anything else.  Then add in your other living expenses like insurance, cell phone, etc.  After those are written down, jot down your savings and debt amounts you want to make each month.  All other expenses come next – eating out, gym membership, subscription services, etc.

THIRD write down your sinking fund expenses.  Sinking funds are a great technique to save for almost anything you want – vacations, car repairs, property taxes, annual bills, activities for your kids, and so much more.

FOURTH subtract your expenses from your income.  You should be left with $0 of income. You might have to do some juggling – putting extra money in savings, spending less on eating out, or something to get that number to zero.

FIFTH start tracking your spending.  There are plenty of ways you can track your spending – you can use the envelope tracking system that holds receipts, you can use a budget template to help you stay on track, or anything else that works for you.