My wife and I live in an older tract home (constructed in 1988); needless to say, it needs some upgrades. As we dream about all the improvements we want to make, something happens; we are forced to think about the order of how to accomplish things. Do we install flooring before the new kitchen cabinets? Does it make more sense to paint the interior before getting double-paned windows or after? What about the timing of finally replacing the original HVAC unit with something more energy efficient, quiet, and effective? With so many competing interests, it becomes tricky to know what comes first.
The same is true when allocating the church’s finances – it’s essential to know the priority when deciding when, how, and how much emergency and sinking funds. In order of importance, build the emergency fund first and then focus on building up sinking funds.
An emergency fund is appropriately named as it contains funds to use in the event of an emergency. If an emergency has yet to happen, there’s probably one just around the corner, which is why building this fund first is so important. An emergency fund is there to take care of an unexpected financial burden – like needing to repair an HVAC unit in the peak of summertime heat that didn’t make it as long as planned. An emergency fund buys time if the church shuts down unexpectedly due to weather, riots, or a pandemic. Don’t over-spiritualize this and categorize an emergency fund as being faithless because it’s not; it’s biblical. “The wise have a generous supply of fine food and oil in their homes, but fools are wasteful, consuming every last drop.” ~Proverbs 21:20 (The Voice).
How Much is Enough?
If a wise person has a generous supply, not using up all they have, does that mean a really wise person stores up more than they need or can use? Of course not. Luke 12:20 and Matthew 6:19-20 contain stern warnings about greed. Finding a healthy balance can be challenging because churches are so different. Some have large mortgages on multiple facilities, while others are debt free. Sarah Thompson at Capin Crouse recommends building an emergency fund that covers 40 to 80 days’ expenses. Churches with less than 20 days’ worth of expenses may find themselves in a financially compromised position in the event of an emergency.
Once the church builds an emergency fund that covers 40-80 days’ worth of expenses, it’s time to focus on building sinking funds. A sinking fund is a way to prepare for a costly, upcoming expense before it’s due. For example, a well-maintained membrane roof should last approximately 20-25 years. If your church just put on a new roof for $150,000, plan on spending at least another $150,000 in 20 years. Building a sinking fund for the roof allows the church to save money for the purchase before it’s due, avoiding a significant outflow of cash all at once.
How to Calculate a Sinking Fund
Calculating how much to save each month is simple: determine the item’s life expectancy, an estimated cost, and the amount of time needed to replace the item. Using the above example to build a sinking fund for a membrane roof:
- Life expectancy: 20 years
- Estimated cost: $150,000
- Annual amount needed to replace in 20 years: $7,500 (that’s only $625 per month)
What happens if the church put a roof on ten years ago but didn’t start a sinking fund to replace it? Adjust the amount of time left to replace the roof. In our example above, modify the time to replace it from 20 to 10; the new annual amount is $15,000 per year or month or $1,250 per month. A sinking fund is a great way to show stewardship by planning for future costs, and it saves having to dip into and replenish the emergency fund.
Having a financial plan, also known as a budget, is not a lack of faith but good stewardship. Part of the plan needs to include planning for the inevitable occurrence of emergencies and replacing high-dollar items. Start by fully funding an emergency fund that covers 40-80 days of expenses. After completing the emergency fund, identify the big-ticket items like a roof, HVAC, or sound system and build sinking funds to replace those items stress-free.