Think about this for a moment. The average life of a membrane roof is 20-25 years, the average life of a commercial HVAC unit is about 15 years, and a sound system can last anywhere from 15 to 25 years. If you want, you can Google carpet, paint, and even IT infrastructure equipment to see the average life span of these high-dollar items as well. Does knowing that these items wear out cause anxiety thinking about how to replace them? How can a church, trying to maximize its budget for ministry and staff, suddenly replace these expensive yet necessary items? The answer is sinking funds. While sinking funds are not something many churches consider or budget for, they are an essential part of long-term financial planning for a church.
What is a Sinking Fund
Simply put, a sinking fund is a way to address upcoming (impending sounds so dire) costs before it is due. It is a deliberate way to set aside a certain amount of money, on a regular interval, to pay for the replacement of costly items. Did you know that Christmas happens every December 25? Of course you do; we all know it is coming. That means that we all have the entire year to build a Christmas fund to buy presents for family and friends. But, when we are not intentional about saving, in December, it becomes an emergency. Then you tap into your reserves, or worse, go into debt for something you knew was coming. A sinking fund is like a Christmas fund for really expensive gifts that you only buy every 15 to 20 years.
It is Not a Reserve Fund
A reserve fund, or savings, is for emergencies. Sinking funds are for expenses that you know are coming up. A church should have 40 to 80 days worth of expenses in a reserve account. To find out more about reserve accounts, check out this post. You may want to physically keep the sinking funds in the same bank account as the reserves, but they should be kept separate through a designated account.
How to calculate a sinking fund
When determining how to calculate a sinking fund, only two numbers are required. The first is to know the life expectancy of the item. For example, a membrane roof should last 20 to 25 years, which is good news because they are expensive. The next step is to estimate the replacement cost. Then, divide the replacement cost by the number of years left until replacement, and that’s the annual amount needed in the sinking fund. Let’s continue with the roof example:
- Life expectancy: 20 years
- Estimated cost: $120,000
- Annual amount needed to replace in 20 years: $6,000 (that’s only $500 per month)
Adjust this formula as necessary depending upon when you start financing the sinking fund. If you have a 20-year roof that costs $120,000 to replace that has been on your building for five years, adjust the life expectancy to 15-years and recalculate. As you can see, the calculation is not complex, but the discipline to set aside the money is.
Operating a church comes with a variety of non-ministry expenses along with the responsibility to plan for these expenses. A sinking fund is a way to strategically plan for the reality that everything eventually needs to be replaced. Calculating the dollar amount and time necessary to finance each sinking fund requires knowing the average life expectancy and the cost of the items. As you prepare for your next budget, take an inventory of the high-ticket, critical items at your church. Then make the hard decision to deliberately set aside money to cover the replacement costs of these items. In the same way that we know Christmas is coming on December 25 every year, these big-ticket items will wear out and need replacing. Don’t let poor planning turn it into an emergency.short url: