Say you receive a large windfall.

One that can pay off all your credit card debt and leaves you with a few thousand for some small, needed, home projects.

What would be the best way to handle this after I pay the cards off?

I see the term "fund your sinking categories", what does this mean?

Any other advice so that I can set myself up for NOT amassing credit card debt?

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  • In your case, it sounds like it means putting the left over money into something like a Home Improvement category.

    "Fund your sinking categories" typically means funding (typically) larger periodic or one-time expenses, a little at a time. Insurance deductibles, home improvement, or something like Vacation or even Christmas, for example.

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  • Property taxes, Amazon Prime/Sam's Club/Costco/BJ's, School registration, vehicle registration, new computer, new car, car repair...ect

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  • And don't forget 3-6 months in Income Replacement if you don't already have that.  I've dealt with windfalls several times.  If it's only a few thousand left after the debt payoff, and you don't have any general emergency savings, I'd probably forego the home repairs a little longer if possible.

    My last windfall was substantial, but also necessary for some large new expenses.  1st order of business was rounding out my emergency fund, so that goal was complete.  I budgeted for the next 8-12 months of the other new expenses, including legal, insurance, and taxes.  With what was left was put into a holding category and selectively released each month towards other planned and unexpected expenses.  And yes, home repairs, improvements, and appliance replacement - most of which has hardly been spent.

    Also consider putting towards an IRA or increasing 401k contributions if those aren't maxxed.

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  • And also, make sure you're fully buffered in that you can use this month's income to budget next month.  If you're not already, I'd use the leftover for that first, probably even before an income replacement fund.

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  • can you explain that to me?  Seriously, please explain it like I'm five years old.

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      • jenmas
      • jenmas
      • 1 yr ago
      • 1
      • Reported - view

      Green Hail think of all your expenses. Not just the regular stuff like rent and groceries. Everything - car repairs, insurance deductibles, school supplies for the kids every fall. Ideally you get to the point where you fund all of these categories each month at a rate of 1/12th of the total amount you spend in a year. It keeps your budget on an even keel and things aren't a surprise for you. Fund your sinking categories refers to this. You also plan for things in the future. Like in 6-10 years you're going to have to spend $10K to replace the roof. Start saving for it now so that when the time comes you don't even notice the expense, you just pay it.

      97% of my categories get the same amount every single month because I have already filled all of my sinking funds including a Loss of Income fund that could cover me for 6-8 months of unemployment. I have a car repair category that I in an even amount on a monthly basis until it hits a cap that makes sense for me and my car.

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    • Green Hail my try:

      How did your grandma buy a couch without using a credit card or a loan? She put every month money aside in a Mason jar to save the needed money. Every month she would put away $100 till she had the money together for the $1000 couch. So basically it took her 10 month. This was called the couch fund. If you want to call it more versatile then let's call it a sinking fund (it's a historical name - don't think too much about the meaning). Now you can create in YNAB a sinking fund for all your future needs  by just creating a category. You can create a category for a future car, a future new TV or whatever you want to spend money on in the future. Then you put every month money aside into this category by budgeting a certain amount of money (like $50 or $75 or whatever you want and have). These are your modern Mason jars. If you did this for a while you will have enough money set aside (besides your other monthly expenses) which you can use to buy what you saved for. 

       

      I have sinking funds for all my yearly expenses (like car registration, Amazon Prime, YNAB fee - yes, I put aside $7 every month so that I will have $84 by the time I need to pay for the renewal, yearly furnace tuneup,...) and also for my unknown expenses like house repairs (I put aside yearly 1.3% or monthly 0.11% of my house value) or car repairs (I have relative new cars (4) so I put away $200 per month) or clothing ($75 per month for me and my wife). If you don't spend the money in YNAB it will roll over into the next month and so it will build up a big Mason jar for every category you have so that you don't have to sweat it when you have a car repair coming up or if you need new pants because you have the money already set aside in the sinking fund.

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  • Windfalls are so wonderful! Congrats on that!
    We had one a few years back that also coincided with the car insurance payment. We were able to pay the entire 6 months lump sum at once, which saved us about $50/month! That's $300 every 6 months, and $600 a year! That's huge! So don't forget to look for savings like that, being able to pay bills in advance or other options that will help you out in the long run.

    We did that the first time last year in October, and we've been able to maintain it ever since. Now I prefund the category with a certain amount from every pay check and when the bill is due every 6 months I know the money is there. Since it changes just a bit each time, I usually set aside a bit more than I need, and then we have a little extra that we can apply to whatever we'd like each 6 months.

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  • Rule 2 -- Embrace your True Expenses (a.k.a., "sinking funds"). By the time a non-monthly bill comes around, you should have cash reserved for it in the budget so you don't have to resort to CC debt that you cannot pay off immediately.

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  • Green Hail That's great news! True Expenses (or sinking funds) are things you know will come up, but you don't necessarily know when (auto/home repairs) or they only happen once a year (insurance premiums and birthday gifts).

    Some of the money you have now needs to be set aside for these large expenses down the road. A windfall is a great way to get a jumpstart on those categories!

    As an example, our home did not have an air conditioner when we bought it. It quickly became apparent that we needed one in time for summer, and got a few quotes. We set a Target Balance by Date Goal for two months before the hot weather would set in—so we were ready to make the purchase.

    Use Rule Two: Embrace Your True Expenses to break the amount into manageable monthly “bills” and budget for them every month. When the bill arrives, those dollars will be ready & waiting!

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