Sinking Funds Can Save Your Budget!
You may be wondering, what are sinking funds anyway? I’m here to help!
If you want to begin implementing sinking funds in your budget, you absolutely should.
WHAT IS A SINKING FUND?
A sinking fund is a type of savings account that you use for very specific purposes. You can use sinking funds to save up for a large upcoming expense or ongoing expenses that you want to be able to cover over a period of time.
IS A SINKING FUND SIMILAR TO AN EMERGENCY FUND?
Short answer. No.
An emergency fund is to cover unexpected expenses that come up, such as job loss or a medical emergency. A sinking fund is to cover expected expenses that come up such as, routine oil changes or funding your annual vacations.
4 THINGS YOU CAN DO TO IMPLEMENT SINKING FUNDS
Select the Type of Sinking Funds: You can create as many sinking funds you like! Some examples of sinking funds you can consider are:
Car Maintenance: For those routine oil changes, windshield wiper blade changes and tire rotations!
Travel/Vacation: To allow you to book travel easily and without going into debt
Holidays/Gifts: If you are a big gift giver or you celebrate most holidays, this can be a great sinking fund to use and implement to cover those costs. Never worry again how you will pay for decorations or pay for that baby shower gift
Open a separate bank account: Sinking funds are their own accounts and you should have them separated from your other savings, especially your emergency fund savings. A high-yield savings account (HYSA) is a perfect account to use for your sinking funds. One of my favorite banks to use is Ally because they allow you to create multiple buckets and label them each! You can have up to 10 buckets!
Set Goals: Sinking funds can either have a minimum balance target or a specific target based on the date. What does that mean?
Your Travel/Vacation sinking fund may be something you consistently save towards each month, regardless if you are going on a vacation that specific month. For these type of accounts, you may always want to keep it at a minimum balance to ensure you are able to always cover upcoming travel and adjust as needed. Example: You may decide your account should always have a minimum of $1,500. Therefore, once you use the funds for an upcoming trip, you may adjust your budget to replenish the account
You can calculate your sinking fund goals by taking the number you would like to save and dividing it by the number of months or paychecks you will save for to meet your goal. Example: If your Christmas budget is $1,000 and you would like to save for 6 months from June to November, you will take $1,000/6 = $167 per month.
Evaluate Sinking Funds: All sinking funds are not created equal. You should evaluate the need for your sinking funds at least bi-annually to ensure they are still serving its purpose.
If you are considering using sinking funds to help you manage your finances, I absolutely recommend doing so as soon as possible. It can make or break your budget!
