I’m a big fan of sinking funds. But what are they?
A sinking fund is a way of saving money for a planned expense you know is coming in the future.
Unlike an emergency fund, which is for unexpected events, a sinking fund is for predictable costs that you can anticipate and plan for. By creating a sinking fund, you can avoid using credit cards or loans to finance your expenses and avoid going into debt or dipping into your emergency fund when they arise.
It can also reduce stress and anxiety about your financial situation. You can create sinking funds for expenses such as:
- Car maintenance and new tires
- Home improvements and repairs
- Travel
- Medical, dental, or vet bills
- Taxes or insurance premiums
- Education or tuition fees
- Birthday celebrations or wedding expenses
A sinking fund strategy has many benefits for your life and budget, such as:
- It helps you achieve your financial goals faster. By saving money for specific purposes, you can avoid paying interest on credit cards or loans. You can also earn interest on your savings. This way, you can make your money work for you instead of against you.
- It helps you stay on track with your budget. By allocating a certain amount of money every month for your sinking funds, you can avoid overspending or under saving for your expenses. You can also adjust your budget accordingly if your income or expenses change.
- It helps you avoid financial stress and anxiety. By having money set aside for planned expenses, you can avoid worrying about not having enough money when you need it. You can also avoid the guilt of spending money you don’t have.
- It helps you enjoy life more. By saving money for things that matter to you, such as travel, education, or entertainment, you can reward yourself for your hard work and discipline. You can also experience more joy from spending money that you’ve saved rather than borrowed.
Lastly, you can also enjoy the peace of mind that comes from knowing that you have the money ready when you need it.
How to Start a Sinking Fund
Starting a sinking fund strategy is easy. You just need to follow these steps:
1. Identify your sinking fund categories. Think about the expenses that you want to save for in the next year or longer. You can use the examples above as a guide or create your own categories based on your needs.
2. Figure out how much money you’ll need for each category by estimating how much each expense will cost and when you’ll need to pay for it.
For example, if you want to save $1,200 for holiday gifts by December, you’ll need to save $100 per month from January to November.
3. Open separate accounts for each category. You can use different bank accounts, online savings platforms, or cash envelopes to store your money for each sinking fund.
The key is to keep your money separate from your regular checking account so that you don’t accidentally spend it on something else.
4. Automate your savings. To make sure that you stick to your sinking fund strategy, set up automatic transfers from your checking account to your sinking fund accounts every month.
This way, you don’t have to remember to save manually, and you avoid the temptation of spending the money on something else. That’s it!
Spending Stress-free
Today’s society is characterized by a ‘buy now, pay later’ mentality, where we’ve grown accustomed to instant gratification. The concept of waiting for more than two days for a delivery has become almost unthinkable, thanks to services like Amazon Prime.
But the issue arises when unplanned expenses result in debt, subsequently leading to feelings of guilt, stress, and anxiety. Not to mention fights over money with your partner.
However, when you allocate funds for planned purchases, the experience is entirely different. You’ll have the ability to pay in full with your sinking funds.
By setting up sinking funds, you’ve just created a strategy that could literally change your life.
You’ll not only be able to bypass debt; you’ll bypass the feeling of being overwhelmed.
I’d love to hear from you. Have you set up a sinking fund before? What’s been your experience?
