You open up your mailbox and there it is – that forgotten annual bill for your auto insurance, home insurance, or property taxes. You open it with trepidation and baited breath, wondering the extent of the damage. Your heart sinks as you realize the amount due will throw your entire finances off-balance for several months.

Sure, those Christmas gift-giving and annual vacation memories were great. But now that the credit card bill funding those memories has arrived, it’s time to pony up and pay the piper.

Do your irregular bills have you on the run? If so, it’s time to dive deep into the budgeting playbook and shore up your protection so you can avoid the unexpected bill scramble drill for good.

The Unexpected Bill Budget-Buster

There are few worse feelings in the world than that of thinking you are finally getting ahead with your finances only to have a large bill you weren’t expecting arrive in the mail. Just when you thought you were getting ahead of the sticks, you find yourself buried in a hole and left with few options other than the Hail Mary.

Whether they be in the form of insurance, holiday spending, or simply annual vehicle registrations, irregular bills are easy to forget and can completely derail your financial progress. If you’re tired of having yet another stretch of a “tight few months” due to a large bill you can’t swing all at once, you’re not alone.

The Risks Of Being Blindsided By An Unexpected Bill

Like a quarterback being blindsided in the pocket, becoming aware of and dealing with an unexpected bill can be a painful experience. Let’s review the potential risks of repeatedly absorbing these blows.

Poor Decisions Made On The Run

Having your finances constantly under pressure is a frustrating and stressful experience. And just like a QB, you’re much more likely to make a bad decision when under duress. Constantly running from bills you haven’t accounted for can make it feel as if your financial game plan isn’t working. Left unchecked, unexpected bills can lead to many people throwing in the towel on the idea of a budget altogether.

Late Fee Bumps & Bruises

Being caught from behind by an unexpected bill can lead to financial bumps and bruises. If your bill is large enough that you can’t make the required payment with the typical notice of a month or less, you’re probably looking at a late fee. Late fees add up over time and hamper your financial mobility.

Credit Card Interest – A Serious Health Risk

Maybe you can’t afford to pay a given bill upon receipt, so you charge it to your credit card instead. Like a QB continuing to play despite the presence of a nagging injury, you’re taking a bad situation and typically making it worse.

The first month this credit card balance goes unpaid, you’ll pay an interest penalty. A disciplined individual could likely pay off this balance over a few months. But if life gets in the way and the balance is left to fester, the potential exists for a mere nagging injury to turn into something far more serious to your financial health.

Long-Term Credit Score Damage

So you’ve continued to limp along, absorbing hit after hit from each unexpected bill. You’ve maxed out your credit cards and find yourself in a situation where the interest alone is growing your balance owed more quickly than you can pay it down.

You can’t afford to even make your minimum payments on time anymore, leading to late payments, interest rate hikes, and derogatory marks on your credit score. This is a financial injury that won’t heal quickly, if at all. You’ll be dealing with the after-effects for at least seven years, and potentially even longer if you don’t receive the required treatment.

Avoid The Unexpected Bill Scramble Drill With The Sinking Fund Audible

If forgotten or irregular bills have had you scrambling in the past, you’ll be relieved to know that there’s a simple solution. And if you’ve been following the Master Your Money series from the beginning, you’ll be able to add this blitz-beater to your playbook right away.

Quarterbacks use audibles to ensure they have the right protection. Former NFL QB Peyton Manning is widely considered the king of the audible, as outlined in the first 1:55 of this NFL.com video. So let’s take a lesson from Manning and dial up your own version of “Omaha” so you can eliminate the unexpected bill scramble drill for good.

The key to avoiding the unexpected bill scramble drill is recognizing that these bills aren’t truly unexpected in the grand scheme of things. You know you’ll have to pay for your auto insurance, home or renter’s insurance, property taxes, vacations, and holiday gift-giving at some point.

Bills for these items are typically only unexpected when received because their annual or semi-annual frequency makes them easy to forget – and prepare for. But what makes these bills so dangerous is also what makes the solution so simple. All you need to forever nix your personal unexpected bill scramble drill is to remember when each bill is due and properly prepare for it.

You should already have the first requirement addressed if you completed the first action item at the end of Mint To The Rescue: Your Bill Pay Safety Net. All that remains is to properly prepare for each non-monthly bill by creating a dedicated savings account in the form of a sinking fund for each.

What Is A Sinking Fund?

The term sinking fund is found primarily in the corporate world and in property tax millage ballot proposals. Sinking funds are funds intentionally set aside in order to pay for a future upcoming expense. The term “sinking” reflects the fact that the balance within the fund will be depleted at some future point in time.

Publicly-funded institutions such as schools often use sinking funds to budget and pay for maintenance or capital expenditures. But we’re going to take advantage of this concept to shore up the protection for your personal budget.

The X’s And O’s Of Sinking Funds

For the purposes of this article, sinking funds are simply savings accounts for each of your large, non-monthly bills that have the potential to bust your monthly budget. To use them, you need to determine how much you need to save each month to cover the annual total of a given bill in full.

You can use this information to budget for and save the required amount for each bill monthly. When the time comes to pay your bill, you will then have the cash on hand to pay it without issue. You can draw up your sinking funds audible in five easy steps:

1. Identify all of your bills received less frequently than monthly
2. Calculate the annual balance owed for each bill
3. Divide the annual total owed for each bill by twelve
4. Create a dedicated savings account for each bill
5. Transfer the required amount from step #3 to each savings account monthly

Steps #1-3 will provide you with the monthly amount which you need to save in advance to ensure you can easily pay each non-monthly bill when it is due. Later in this series, we’ll review the logistics of steps #4-5 related to setting up dedicated accounts for sinking funds, as well as using them for sources of large discretionary spending such as vacations and holiday gift-giving.

However, for now we’re simply interested in continuing to refine the techniques you need in order to properly cover the second base of budgeting, consisting of bills and non-discretionary spending only.

How Mrs. FFP & I Use Sinking Funds

For sake of example, below are the non-monthly bills which Mrs. FFP and I use dedicated savings accounts / sinking funds to save for in advance:

• Home Insurance
• Auto Insurance
• Life Insurance
• Property Taxes
• Vehicle Registration
• Trash Removal

These categories all represent fairly significant expenses of more than $100/year which we elect to save for monthly rather than allow the possibility of any one of these bills putting us on the run when it comes due. This system has worked well for us for many years.

We simply calculate the monthly equivalent of the annual total for each of these bill categories, then transfer that amount monthly into dedicated savings accounts named for each. We never use the money in these accounts for anything but the intended expense.

When each bill comes due, we simply transfer the money from our sinking fund to our checking account, pay our bill, and review our latest bill to see whether the amount we save each month needs to increase or decrease. This system completely takes the stress and fear out of facing non-monthly bills.

The Benefits Of Sinking Funds

Using the concept of sinking funds in your personal finances has multiple benefits. Some obvious, some not. Let’s break each of them down in detail.

End Your Unexpected Bill Scramble Drill

The first and most obvious benefit is simply that of eliminating your typical budget-busters. The large bills that you can’t pay out-of-hand in the month they are due without cutting other areas of your budget or putting the balance on a credit card. Imagine how much nicer it would be to not have to ad-lib your spending every month a larger bill shows up in the mail!

Avoid Unnecessary Late Fees

This is pretty self-explanatory. If you have the cash on hand to pay a bill in full, you should be able to avoid paying a late fee. This is virtually a guarantee if you couple your sinking funds with a bill pay safety net to prevent you from forgetting to pay your bill.

Eliminate The Interest Penalty

Dealing with a large bill by putting it on the credit card will result in an interest penalty if you carry that balance for more than one statement cycle. Saving the required cash per month in a sinking fund eliminates this possibility and saves you money in the process.

Say you charge a $1,000 bill to your credit card at the national average interest rate of 16.41%. You work on paying down this large bill over a span of three months at $333.33 per month. Doing so means that original $1,000 bill will cost you an additional $28.23 in interest. Paying this $1,000 bill in cash when it arrives eliminates this interest penalty entirely. Paying a bill is bad enough, don’t penalize yourself for doing so!

Save Money With Pay-In-Full Discounts

Many service providers offer pay-in-full discounts if you pay your bill annually rather than in monthly installments. For example, we save a combined $465.96/year simply by paying our home and auto insurance policies annually rather than monthly. That works out to a 19.3% and 16.9% discount on the two policy premiums, respectively. Our former trash pickup service offered a similar, 8.3% discount.

Using the lessons learned in Your Rocket To Riches and this compound interest calculator, we find that an annual savings of $465.96 has the potential to turn into $202,703 if invested over the typical 50-year working career of the average adult (age 18 – 68). Add another 11 years to reach the current American life expectancy of 79, and this hack alone could total $434,531 in savings.

This is where your sinking funds strategy starts to pull double-duty. Not only is it protecting your blind side, it’s saving you money at the same time.

Identify Your True Disposable Income

Setting up dedicated savings accounts and using the concept of sinking funds in your monthly budget gives you a much more accurate picture of your true disposable income. Do you spend the majority of the money left in your account every month after you pay for your bills and expenses? This would be dangerous if you weren’t first covering your large, irregular bills.

Accounting for your annual, semi-annual, or quarterly bills in your monthly budget prior to any discretionary spending ensures you won’t accidentally overspend and be left scrambling with a bill in hot pursuit.

Focus Your Cost-Saving Efforts

Sinking funds offer an additional, intangible benefit to those listed above – a greater visibility and understanding of your spending. Breaking large, annual bills down into monthly proportions helps you better evaluate your spending. For example, you can more easily compare spending across categories on a monthly basis. Spending more on auto insurance than you are to feed your family every month? Might be time to start auto insurance shopping.

Summary

Sinking funds are the perfect answer to permanently ending the unexpected bill scramble drill in your household. They’re simple to operate, can save you some serious money, and provide peace of mind.

Breaking down your irregular bills into monthly requirements is also essential to calculating your true discretionary income. This information is required in order to master your money with the Financial Freedom Project Budget.

Complete all of the specific action items below, and you’ll find a newfound ability to stand tall in the financial pocket and survey the field for additional savings thanks to the improved protection sinking funds can provide your budget.

Drawing Up Your Sinking Funds Bill Protection Plan

For those of you who have been following the Master Your Money series from the beginning, below are the next steps on your journey to financial freedom:

1. Review your bills in Mint and create a list of quarterly, semi-annual, or annual bills.

2. Identify the current annual total owed for each bill, using your current policy or last bill.

   1. Review your existing payment plan for each bill and identify whether this amount will be less if you begin paying in full.

3. Determine your annual total for each bill and divide by twelve to determine monthly requirements.

4. Create custom sub-categories for each of these bills in Mint Transactions under the “Transfer” category. You will use these to label the transfers you make later in the process from checking to dedicated savings accounts*.

   1. I recommend using a transfer sub-category naming convention of the dedicated savings account purpose followed by “TR”. For example, “Auto Insurance TR“. This will help differentiate your transfer transactions in Mint from actual bill payments, which Mint will list as “Auto Insurance” in the above example.

5. Create recurring monthly budgets for each of the irregular bills on your list, using your newly-created transfer sub-categories.

6. Review your updated Mint Budget Scoreboard and determine the total monthly impact of your irregular bills.

*Note: We’ll cover creating dedicated savings accounts for your sinking funds and scheduling transfers to and from them later in the series, along with creating monthly budgets for discretionary spending categories such as holiday gift-giving and vacations. This is to prevent you from duplicating your efforts as you work to master your money – you’ll see why later on.