Sinking funds

The first fund pays down a debt: someone who owes K12,000 and wants it gone in three years moves a set amount into an account for that debt every payday, roughly K155 a fortnight before interest.

The second fund gets ready for a bill everyone can see coming, such as the insurance renewal or a major repair, so the bill arrives already paid for. Either way, what the fund really holds is a promise made on payday that the debt or the bill comes before the spending.

I run both funds. My fire extinguisher is the first kind, and it takes the largest of the three fortnightly transfers I wrote about yesterday. It has always had one job at a time: first what I owed, then a house deposit, and now the mortgage.

My smile account is the second kind, and it grows for holidays: the flights, the accommodation, the experiences and the souvenirs. I started it while I was still paying off Stella’s debts, topping it up by hand with whatever the fortnight allowed, and when the balance started to grow, I realised I could actually plan a holiday for the first time in years. The first thing it paid for was my travels in Sri Lanka.

The sinking fund has its roots in the early eighteenth century, when Britain attempted to get its national debt under control. In 1716 and 1717 Britain adopted a scheme from Robert Walpole, then running the Treasury. The scheme sent surplus revenue towards the principal of the national debt, the amount Britain had borrowed, on top of the interest it paid each year. Sixteen years later Walpole was running the country, and in 1733 he took £500,000 out of the fund to keep the land tax low.

The technique itself runs in three moves. It names the bill, divides the cost by the paydays left before it lands, and moves that amount into its own account every payday. Uniforms and stationery for the new school year, the Christmas trip home, the car registration when the sticker runs out: each of them arrives exactly when everyone knew it would. A sinking fund turns each one from a January shock into a small fortnightly figure.

Picture Antonia, who teaches Grade 5 at a primary school in Mount Hagen and gets paid fortnightly. Every January her two children need uniforms, shoes, stationery and books for the new year, about K1,300 all up, and for years that bill swallowed her first pay of the year while her husband’s public servant income carried the house until the next one.

Two Januarys ago, the week after the bill landed, she started moving K50 into a separate account every payday. Twenty-six paydays later the account held K1,300, this year's school costs came out of it, and her first pay of the year went where it always goes, to the family.

It works on the costs a person can name. A car breakdown or an urgent flight home picks its own date, and that kind of cost is covered by my Mojo, the emergency fund, which sits at a bank I use for nothing else, with no card attached.

The warning inside the oldest sinking fund is that it works only while the money stays with the job it was set aside for. I keep my fire extinguisher hard to reach rather than locked away, and everything in it has gone to the job I set it. The house is the proof.

Best

Amanda

P.S. What’s your view on today’s newsletter? Did I miss something out that you’d like to share? Write to me, [email protected]. I may not get back to you, but I will try to read what you send in.

Wild Money is general information only, drawn from my own experience and research. It isn't financial advice, and nothing in it is a recommendation to buy, sell, hold or manage money in any particular way. What worked for me won't necessarily suit you. Please seek advice from a licensed financial adviser before making decisions about your own money.