Sinking Funds 101
Budgeting and saving can be tough at first. You can feel like you’re on the right track and then boom a budget buster or a savings snatching event just slides into your life. I get it. Life happens but it’s time to get honest with yourself. Is that situation that busted your budget and/or snatched your savings an actual emergency or the result of poor planning? Many times it can be the latter.
A major emergency with your car is an unplanned expense, you forgetting that you have to pay your registration fees for your car is the result of poor planning. Having to be rushed to the emergency room is an unplanned expense but you waiting until the last minute and paycheck to buy Christmas gifts is the result of poor planning.
I’m not here to step on any toes but if we’re going to be transparent about finances we have to be honest with ourselves I can write this easily because I have been in the exact situation. Enter, sinking funds.
What is a sinking fund?
A sinking fund is a way to practice intentional saving for planned expenses. The best part about a sinking fund is that you’re probably already familiar with it, making it so much easier to begin this practice ASAP. You’re might already be used to saving for what you want (a trip or your new iPad), now you can practice saving for all the boring things you need to function as an adult (car registration, yearly fees, etc.)
I want to be clear, your sinking fund is not the same as your emergency fund. Your emergency fund (whatever you’ve decided that amount to be) is for genuinely unplanned expenses and financial emergencies.
You can start a sinking fund for literally anything and that’s the great thing about it. Anniversaries, birthdays, yearly subscriptions, a good sew-in, anniversaries, Christmas shopping, your new car, and the list goes on. When you attach a tangible goal to your saving, it makes you less tempted to spend those savings on random things you don’t need/want.
How can it help me?
When you’ve budgeted a certain amount for spending this month and then you suddenly remember you wanted to go Black Friday shopping or that you need an oil change, where do you pull that money from? Do you snatch it from another budgeting category, do you take it out of your savings account, do you put it on a credit card? These options can leave you feeling guilty and scrambling to move money from something else you need or want more.
A lot of folks ask me about how I could get excited about Black Friday shopping, my sinking fund is how. I’ve intentionally saved the money that I want to spend for Black Friday and I won’t spend anything more. I can get excited because I’ll be spending guilt free. It won’t have any impact on my November budget at all, I won’t have to pull any money from my savings and I won’t have to put it on a credit card.
How do I get started?
Some folks save for their sinking funds and their emergency fund in one savings account, others set up separate savings accounts for each sinking fund and for their emergency fund, others put aside cash for each sinking fund. The great thing about personal finance, is that it is personal. You can do what works for you. Here’s how to get started:
Make a list of any planned expenses you would like to save ahead of time for (birthdays, vacations, work done on your house or car, etc.)
Figure out how much you can afford to save every month and/or paycheck
Assign money to each sinking fund based off of this simple math:
Total cost of sinking fund/ amount of time until you want to spend for that event
(ex. If you want to spend $600 for Christmas and you start your sinking fund in January you need to save $50 a month until Christmas. If you plan to finish shopping in November then you’ll need to save $54.54 a month)
4. Spend only the amount you have saved
5. Spend that money guilt free
Sinking funds are an awesome way to save money for things you want and need without busting your budget. They can help you stay on track on your debt free journey, on your road to financial freedom, or just help you in meeting your financial goals while still living a life you love. What upcoming expenses are you saving for? Let me know!