How To Use Sinking Funds To Reach Your Financial Goals
Do you struggle to pay expenses that happened less frequently throughout the year? If so, it’s time to set up a few sinking funds.
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You may have heard me talk about sinking funds before because I have quite a few of them.
I love putting money aside and having money available when I need to use it. So, let’s jump right in.
What are sinking funds?
Sinking funds are mini savings accounts that you use to save for specific purposes.
Those purposes include expected expenses that you don’t pay for on a regular basis.
Sinking funds are used to prepare for things that you know are going to come up.
The goal with a budget is to avoid taking on new debt and only use the emergency fund for a true emergency.
The money you save is available without dipping into your emergency fund and without taking on any new debt.
Do sinking funds replace emergency funds?
The answer is no. Sinking funds do not replace your emergency fund.
You save your emergency fund so that you have money in case there is an emergency that you aren’t prepared for.
Sinking funds include money that you save for things that you know are coming up.
The concept of emergency funds and sinking funds are the same. When you use these funds, replace them as soon as possible so that you’re ready for the next thing.
The difference is that emergency funds are used for things that you don’t know will come up, and sinking funds are used for things that you do know will come up in the future.
Types of sinking funds
There are three types of sinking funds.
There are sinking funds for goals, things that you know are coming up, and sinking funds for fun things.
To give you a few examples, sinking funds for goals could be saving $2,000 in one year.
Sinking funds that you know will come up are car repairs, home repairs, oil changes, car registrations, and Christmas.
The last category of sinking funds is for fun things like birthdays and holidays.
How much money should you save?
The answer to this question depends on what you’re saving for.
To get this total, you need to figure out exactly how much the thing that you’re going to use the money for costs.
When you have that total, divide it by the amount of time that you have to save.
If you want to save $100 for your car registration in two months, you need to save $50 for the first month and $50 for the second month.
If you want to save for Christmas starting in January, then you put a certain amount of money into your sinking fund every month from January until December.
Be sure that you are realistic with the amount of money that you need to save and the amount of time that you have.
Pay attention to the money that you’re bringing in as well. You don’t want to have a sinking fund that requires $500 a month if you don’t have $500 available each month to save.
Where to keep them
You have a couple of options for places to keep your sinking funds.
The first place is cash envelopes. Cash envelopes are envelopes that you use to save money.
Anytime you’re ready to put money towards your sinking fund, you will go to the bank, pull out the cash, and put it into your envelope.
The next place to keep your sinking funds is in savings accounts.
For this method, you will open a savings account specifically for your sinking fund. Once you get paid, transfer that money from your checking account to this savings account.
This method makes it easy to see how much you have in each sinking fund.
The last place to keep your sinking fund is in your regular checking account.
My husband and I do this, but we do it because we use YNAB to budget our money.
It’s easy to specify how much money goes into each sinking fund without using separate accounts.
The bottom line
Sinking funds are a very important component of a good budget.
They keep you on track, out of debt, and help you reach your financial goals.
It takes a lot of hard work and discipline to build up your sinking funds, but you will be prepared for most things that come up within your budget.
So, now I want to hear from you. What sinking funds do you currently have? Let me know in the comments.