Sinking Fund Approach for Vacations and Big Ticket Purchases

I'm pretty sure many of you have already started thinking about taking a vacation this year or maybe you are thinking about buying new furniture or other big ticket item. Whatever it is that you plan on buying, plan early enough where you don't have to use a credit card to make that purchase, and end up paying more for the trip than you should.

If you know my family well, you know that we travel quite frequently (especially Sam). In the past 3 years we have been blessed with the opportunities to travel all over the country as well as a nice little vacation in the Bahamas. Although for most of these trips we did not have to pay for the travel expenses (airfare or hotel) there were a few trips that we had to fund ourselves and even if the airfare or hotel were paid for, we still needed money to eat, ground transportation, for entertainment, and of course to shop!

Sinking Fund Approach
When planning for a trip or to purchase a big ticket item (meaning costing more than $500.00) I ask myself these three simple questions:

1. How much money do I need?
2. How long do I have to save it?
3. How much do I need to save each month?

This is called the Sinking Fund Approach.

Sinking Fund Approach Example
Let me share an example with you:

This year in August, we have a family reunion to attend on Hawai'i Island. Which means we need airfare for three (thank goodness the new baby will fly for free), we will need hotel/vacation rental accommodations for 4 nights, car rental for 5 days, money for food, entertainment, etc. I did a little preliminary research to find out how much all of this would cost and this sets our baseline budget. If I am able to find better deals from now to then great, if not then I have to adjust our budget to accommodate.

$525.00 Total Airfare Cost for Three Round Trip Tickets
$400.00 Total Hotel/Vacation Rental Accommodations for four nights
$350.00 Total Car Rental for five days
$250.00 Total budget for food, entertainment, and misc. expenses
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$1,525.00 Total Trip Budget

This answers the question: How Much Money Do I Need?

From now until the trip, we have six and a half months to save. So, this answers the question: How Long Do I Have To Save It?

Now to answer the final question: How Much Do I Need To Save Each Month? It's simple math (and I almost always use a calculator) Divide the total amount that you need by the amount of time you have to save it.

So for this example:

$1,525.00 divided by 6.5 months = $234.62 per month

Next Step: Savings Plan
Now that I now how much I need to save each month to be able to go on this trip, I need to make a savings plan. We already operate on a zero-balance budget, which means we allocate every incoming dollar to pay a bill, living expense, or to pay down any outstanding debt. Now how can I squeeze $234.62 out of our monthly budget?

To make this amount easier to swallow, I like to break it down to smaller amounts. To achieve this savings goal we need to save $59.00 a week or about $8.50 a day. Now that amount doesn't seem so bad when you look at it this way. We now have to look at our current savings as well as other opportunities for us to earn/save money (i.e. garage sale, selling old items on cragislist, couponing, etc.) in order to save the amount we need by the time the trip comes up.

Other things to consider, especially when it comes to travelling is booking reservations early enough to save money. As we save the money needed for each travel expense we will book the reservations. For example, in about 2 and a half months from now we will have enough to book our airfare, which is a good amount of time to still get a good deal.

Don't Resort to Using A Credit Card
As easy as it would be to swipe our credit card and just pay for the it and get it over with, we have other financial goals that will be affected if we do that. And no vacation or TV is worth pushing back our goal of owning a home this year. It's all about opportunity costs, we know we want to go to the reunion, so when it comes down to spending money from now until then, we have to ask ourselves do we buy this item that we kind of "want" or do we save the money to put towards the trip.

So start planning for those larger purchases early and try the sinking fund approach for your next vacation or big ticket item purchase.