You will be able to calculate a monthly sinking fund amount from a cost's size and the months left until it is due.
Open your list of lump-sum costs and find the next one due. Count the months between now and the month you will pay it. That count sets how much you need to put aside each month, and the rest of the method builds on it.
A sinking fund is money set aside each month for a known future cost, so the full amount is ready when the cost arrives. It turns a lump that breaks a month into a steady budget line, the same as rent. You can keep one sinking fund per cost, or one pot holding several, as long as you know how much of the pot belongs to each cost.
To get the monthly amount, divide the expected cost by the number of months until it is due.
Take Wei Ling. This year's Lunar New Year cost her about S$880 and broke her February budget. That is the problem from lesson 3.1. These are invented example figures, and your own costs and months will differ. In March, just after the festival, she expects next year's to cost the same. Next Lunar New Year falls in February, eleven months away. S$880 / 11 = S$80 a month, which she saves every month from March to January.
She does the same for her two other largest irregular costs. A Penang trip with friends in November is expected to cost S$900 and is eight months away: S$900 / 8 = S$112.50 a month. Christmas presents plus family birthdays, which cluster in December, come to about S$360, nine months away: S$360 / 9 = S$40 a month. Adding the three gives S$80 + S$112.50 + S$40 = S$232.50 a month to set aside.
For your own costs, the steps are the same. List your known future lump-sum costs. Estimate each one and count the months until it is due. Divide cost by months, then add the monthly amounts to get the total you need to set aside.
The number of months until a cost is due drives the monthly amount. If Wei Ling had started in January, one month before the festival, she would have needed all S$880 in one month. Saving the whole lump in one month is the problem the fund is meant to avoid.
A cost that is due soon needs a high monthly amount in the first year. Once it is paid, the next round is twelve months away, so the monthly amount drops. In year two, Wei Ling's Lunar New Year fund is S$880 / 12, about S$73 a month. After each cost is paid, recalculate over twelve months for the next round.
The first year of sinking funds is the expensive one, because you are catching up on costs that are already close. If your first-year total looks too big, it will ease in later years as each fund moves onto a twelve-month cycle.
Money left in your everyday account looks like spare cash, and you will spend it on a sale or a dinner before the cost arrives. Keep sinking funds in a separate account, or in a labelled sub-account or pocket if your bank offers one. Ideally it has no debit card attached. Give it a name that says what it is for: "yearly costs" works better than "savings 2".
One account can hold all your sinking funds if you keep a running note of how much belongs to each. Keep that note in the same spreadsheet as your budget, so you update both at the same time.
Keep sinking funds apart from your emergency fund. The emergency fund is for costs you could not see coming, and the sinking fund is for costs you could. If the two share an account, regular costs like Lunar New Year slowly use up the safety net, and you only find out on the day you need it.
If a cost comes in under plan, don't spend the leftover as a reward. Roll it into next year's fund for the same cost, which lowers next year's monthly amount. Say Wei Ling's Lunar New Year costs S$800 instead of S$880, leaving S$80. With that S$80 rolled over, she needs S$880 - S$80 = S$800 more over twelve months, which is about S$67 a month instead of S$73. Over a few years, rolled-over leftovers make the funds cheaper to run.
If a cost comes in over plan, cover the gap from another sinking fund that has spare money, or from that month's wants. Then raise the estimate for that cost next year.
Lesson 3.4 puts all your sinking funds on one calendar. To prepare for it, take the list of lump-sum costs you made after lesson 3.1 and pick out the three largest, along with the month each one is due.
Work out the monthly sinking fund amount for your three largest irregular costs from lesson 3.1.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).