Sometimes we need moneyreallyquickly, and a lot of the time it’s for anemergencythat we didn’t know was coming. This cantotallybe solved by using an emergency fund.
There’s a totally separate type of expense that we run into, these expected expenses are the perfect times to usingsinking funds.Before starting this blog, I’d never even heard of a sinking fund before and now I’m hooked and want to have a sinking fund for every aspect of my life!
Understanding sinking funds iskey to being prepared for expenses in advance, and I’m here to teach you what they are, and how to use them. I know you’re probably a busy, busy bee and might not be able to get all this information at once. I highly suggest you pin this content for later so you can look back at a more convenient time!
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So, the first step to getting sinking funds set up is to understand exactly what a sinking fund is, so let’s dig right in. Think of a sinking fund as apot of goldat the end of arainbow.A sinking fund is essentially a nice pile of money thatyou choose to collect with a specific purpose in mind, and you use this money for that one thing andonlythat one thing.
Sinking funds are the best way to save money for a specific event that youknow is going to happen either every year, or ever few months.
Some examples of popular sinking funds:
- Christmas
- Car Repairs
- Vet Check-Ups
- Home Repair
- Etc…
So, let’s say you put away $100 a month becauseon average your car repair cost for a year is a little over $1000. This means you’ll have a nice pile ofcash to be able to pay your car repairs without having to go into credit card debt. Andbonus you get to earn a bit of interest on this money as well. Sounds pretty good right?
Why are Sinking Funds a Good Idea?
Most of us spenda lotof our time reacting to things. We react to other people, we react to the weather, we react to notifications on our phone, but the one time we don’t want to be reactive is when we’re thinking about our finances!
When we need moneyquicklywe often take areactivepath, rather than a proactive one.We’ll reach for our credit card and think about the repercussions later.
Sinking funds allow us to beproactive,not reactive. It makes it easier to plan for the future and not just let things happen to us! Being proactive is a huge quality of the most highly successful people, and adopting this way of life is agreat way to become financially successful.
How to Set Up A Sinking Fund
The first thing to figure out when you decide to start using sinking funds is where you want to keep the money. There are a few rules to where you should keep your sinking fund money.
The first, is that you want to make sure the money iseasilyavailable to you. This means that you want to have easy access to that money, without incurringpenalties for withdrawing the money early.
The second, is that you shouldnever leave your sinking fund in a high-risk investment where you can lose all the money. Why? Because this money has apurpose and you don’t want to lose it all.
The best place to leave a sinking fund is just in a regular ol’ savings account. This is because it’s easiest to take the money out of a regular savings account, you can’t lose the money, and savings accounts have a decent interest rate (not amazing, but decent).
Theonlything you need is a good budget, because its’ very hard to keep adding money to a sinking fund if you don’t have a plan for every dollar. What’s the best budget for beginners? I always recommend using the Zero-Based Budget because it’s simple, and can make your life a lot easier.
All you need to do is start putting money into a sinking fund is add an extra line item in your budget for each sinking fund you decide to create!
How Much Money Should You Put in Sinking Funds Each Month?
How much money you put away each months depends entirely onwhenthe event could occur, and how much it’ll cost. If you’re planning for something that only happens once a year, you can put away less each month. If it’s something thatmighthappen tomorrow, you may want to increase this buffer quicker to be safe.
The nice thing about sinking funds is once you hit a certain amount of moneywithout touching it, you can stop funding it entirely.
For example, if you need $2,000 in your technology fund just in case your laptop breaks and you hit that $2,000 mark, you can start using that $150+ a month on something else!
Which Sinking Funds Should You Have?
This isn’t a totallycomprehensivelist of every sinking fund you’ll ever need, that depends on yourpersonalcirc*mstances and what you need to be saving money for. One person may need apodcast equipmentsinking fund, someone else may have akid’s birthdaysinking fund. You never know! So here are a few sinking funds that are pretty universal:
#1 – Car Repair
Having a car means throwing a lot of money at a big metal box that just gets you from one place to another. Fun stuff, right? Wrong.
But if you plan to own a car in your lifetime, it’s something youneed to plan for. Having a car means that you’llinevitablyhave to pay some kind of repairs because they break.
You can use your car fund for things like your yearly sticker, your license renewal, speeding tickets, new floor mats, any repairs, pretty muchanythingthat is involved with owning a car.
#2 – Dog/Cat/Bird/Etc Costs
Weneverwant to think about our pets getting sick or passive away. If I even for a second think about my puppy passing, I start crying instantly, seriously. But animals aren’t invincible, and we need to plan for their injuries and illnesses as well.
Having a pet gets pretty expensive, so this emergency money can go to anything including yearly check-ups, medicine, new collars, leashes, dog food, and maybe even your pet’s birthday!
#3 – Home Repairs
If you own a home, you’ll have tofixsomething soon. It may be something small, like a light bulk, but it could be something huge like a brand new roof. You never really know what’s going to happen when you own a home and it’s always smart to be prepared.
Home repairs add up really quickly and it happens in the blink of an eye. Having that money in the bank canreallychange the way you treat your home, and a lot of the time you’ll pick more frugal, intelligent fixes.
#4 – Technology
If you’re anything like me, you’ve dropped a phone (or three) and cracked a screen. I once had a laptop literally overheat and start melting in the middle of a college semester. This is proof that some of the most expensive things we own can justbreakat a moment’s notice.
Putting a $500 phone or a $1,500 laptop on a credit card seems like a good idea at the time but it can take youmonthsto pay it all back. This is why a technology sinking fund isveryimportant.
This sinking fund could replace your laptop, phone, headphones, security cameras, etc.
#5 – Travel
Travel funds can really take two forms, one fun, and one not-so-fun. Of course, you can set up a sinking fund for a yearly family vacation to enjoy. However, the real sinking fund you should set up is a funeral/sickness sinking fund. I know, this is super depressing and morbid.
However, at any given time a family member could pass away or get really sicking without you havinganynotice and you may need to travel across the country (or even the world) to be able to be there for the funeral and be able to take care of your family.
Plane tickets areexpensiveand when it happens quickly you don’t have an opportunity to plan a cheaper ticket, so it’s really great to have a thousand or more dollars in the bank just to be prepared for these occurrences.
#6 – Christmas
Christmas always seems to be really far away, until it isn’t. Every year after Christmas I find myself saying “next year, I’m going to start saving for Christmas before summer! I’m going to beso prepared”but it never happens. Christmas never changes. It always comes.
Starting a sinking fund for Christmas presents is a great way to save yourself a ton of money in interest, as well as keeping your Christmas costs lower because you don’t over purchase as often when you use cash.
An Example of a Sinking Fund
Let’s do aquickexample of exactly how sinking funds work in a real-life situation we all face.
Let’s say that Catherine is a mother of two young kids and is planning for next year’s Christmas. Her kids are still under 5 so she decides she wants to spend $250 on each of them as well as $500 on all other gifts (husband, parents, siblings, etc.). This means Catherine needs a total of $1,000 by December 25.
If she starts working towards his goal on January 1st, she’ll have 12 months to save this money. To know how much she needs each month, she’ll divide $1000/12 and discover she needs about $84 a month.
When you think of Christmas as $84 a month, instead of $1000 in December, it’s much less daunting and makes everything much less stressful.
Final Thoughts
Sinking funds canreallychange how you think about your finances and how you handle your money. You can start with just one or two that make the most sense for your life and go from there.
If you use any creative sinking funds, let me know in the comments below because I’d LOVE to add some new ones.
