You can use a sinking fund to save for future major expenses. Some of you might not have heard of the term sinking fund. It is a financial term. Its approach is applicable for everyone. In real estate, when a landlord has a property that he rents, he knows that several items in the home are going to wear out and will need to be replaced. The owner figures out the replacement cost and the expected life of the item. Then, he divides the total replacement cost by the expected life of the item.
Lets say that the landlord feels the roof will last 20 years and the future cost of the roof will be $10,000. The life in months of the roof is 240 months. In order to figure out what amount he needs to save each month for his roof, the landlord divides $10,000/240. The landlord needs to save $41.67 per month, so that he’ll have enough money saved up to replace the roof. He can also do that for the flooring, air conditioner, heater, appliances, etc. that will wear out and need replacing.
As wise and savvy homeowners, you too can take this approach. Create a sinking fund for all of items you want to replace in the future. You don’t have to create separate accounts for each; one will work for everything. You can even include a car replacement in your sinking fund. Save your money in the sinking fund, so you won’t have to borrow the money when the item needs replacing.