Operating a church, especially one with a facility, is becoming increasingly difficult in today’s complex economic climate. Many churches are finding that attendance did not return to pre-pandemic levels and, as a result, are experiencing decreased donations. On top of decreased donations lies the impact of inflation; it’s not only impacting personal finances, it’s affecting the church, too. Churches are seeing higher costs on utilities, insurance, and cleaning products, not to mention mortgage, rent, and even compensation costs. But what happens when an aging HVAC system breaks down? Or is it time to replace the roof because one more patch is no longer a viable solution? Or any other list of aging high-ticket items that, when worn out, replacing them puts a tremendous financial strain on the church. While these might sound like emergencies, technically, they are not. Everything has a life cycle, and part of good stewardship is recognizing and planning how to replace items without creating financial hardship for the church. The solution is sinking funds.
What Is A Sinking Fund
A sinking fund is a strategic way to fund known future costs before they are due. That’s what differentiates a sinking fund from an emergency fund. Emergency funds are great at taking care of unknown, sudden expenses. However, a sinking fund takes care of the known expenses through planning and diligence. Let’s use the roof as an example because, to some extent, most roofs leak, and all have a life span. A sinking fund acknowledges an item’s life span (like a roof) and allows the church to set aside a certain amount each month until there is enough money to replace it. It’s not uncommon for a church with a facility to have several sinking funds for large-ticket items like a roof, HVAC units, sound systems, lighting, etc.
How To Create A Sinking Fund
Churches unfamiliar with creating a sinking fund can follow these easy steps:
- Step 1: Select the items that require a sinking fund. It’s easy to start thinking everything from batteries to lightbulbs needs a sinking fund. They don’t. Use sinking funds for large purchases with a 10-20-year life span.
- Step 2: Research the life span of the items. Understanding an item’s life span is essential. It provides the time frame required to fund its replacement fully. For example, a membrane roof should last 20 years. Mathematically, the church has 20 years to save a portion each month to replace it.
- Step 3: Estimate the cost of the items. Knowing how long the item lasts is only half the battle; it’s important to estimate (with inflation) the cost to replace it when the life span ends.
- Step 4: Establish a timeline to replace the items. If a church put on a new membrane roof (it should last 20 years) 7 years ago, the timeline to fully fund the replacement is no longer 20 years; it’s down to 13 years.
- Step 5: Calculate the monthly amount. With the hard work of researching the timeline and costs completed, it’s time to calculate the monthly amount to put into the sinking fund. The calculation looks like this: Divide the item’s total estimated replacement cost by the number of years left until it needs to be replaced (annual cost), then divide by 12 to get the monthly amount.
- Step 6: Include the sinking fund(s) in the budget. Defining the monthly cost is the academic part of a sinking fund. Finding a place in an already tight budget requires discipline. It helps to remember that the church will pay for these items eventually. Still, it may make sense during lean financial times to suspend funding a sinking fund item for a period of time and then adjust the replacement timeline when donations permit.