The Secret to Sinking Funds
Are you interested in what a sinking fund is and don’t know the difference between it and a savings account? Well let’s talk about it. The secret to a sinking fund is that it is how you save not just where you save it. A savings account is where you put your money. So, the two work together to help you reach your goals. Let’s say you have a savings account and many goals you are trying to reach. Pretend, you are saving up for a vacation (my favorite thing to save for), a new to you used car, private school tuition and Christmas gifts. From this list you should grasp that these are all things that are coming in the future, and you can plan for. If it is an unexpected expense, you need to cover, check out the last post about Emergency Funds.
The benefit of having sinking funds is you can save up for what you need and pay in cash. That means there is no need to spend on credit cards or take out loans. You pay for what you want and don’t have to worry about later consequences. Sinking funds help with:
Save for anything and everything
Plan for all the fun you want to have
Remove any guilt or purchase remorse
Prepare for expense you foresee
Now let’s talk about how to create a sinking fund. First decide what it is you are saving up for. Maybe it’s something small like a birthday gift or perhaps something grand like a down payment on your first home. Either way both are great things to save for so that you start planning and nothing surprises you. The next thing is to decide where you will keep your money. A regular saving account will work just make sure it does not charge you. This way you don’t pay fees. Storing all your money in one savings account for multiple sinking funds can get confusing. You won’t know when you reach your goal if it is all pooled in one place unless you have a system to help you keep it straight. I suggest either a budget tracking app like Everydollar where you can track each fund, separate saving accounts, or some type of excel sheet. Then decide how much you need to save. Take the total amount you need and divide it by the number of months or weeks you have from now until the need to purchase. So, if the Cruise you are dreaming of cost $5000 and it is a year away 5000/12= 416.67 per month you need to be saving. Last make sure you budget for your sinking fund so you don’t forget to put money in each month.
Now that you know that the secret is that it is not separate from your savings, but infact a stragegy to help you save I hope you will give it a try. When you save up for expenses you know are coming it will help you avoid dipping into your emergency fund.
