Maybe you’ve heard of them, maybe you haven’t, but today we are going to dive into what is called sinking funds and why you should have them.
Not Your Typical Savings Account
Sinking funds are a type of savings but they are not your typical savings account.
Traditional savings accounts are separate from your regular checking account. Savings accounts are additional accounts at our banks where extra funds reside. They are generally for long-term savings such as an emergency fund or a down payment on a new house. And while there might be a specific purpose for the funds in a traditional savings account, the purpose is not usually reoccurring.
Sinking funds, on the other hand, are usually accounts (though not always in a bank) that involve setting aside funds each month for specific, recurring events in your life.
These recurring events most often occur once a year and include events that cost us money to celebrate or execute. This includes birthdays, Christmas, yearly vacations, memberships, and so on.
How to Set Up Sinking Funds
Sinking funds are an incredible tool and system to help you manage your finances and prepare for upcoming events.
Setting up sinking funds will stop you from overspending or feeling stressed when annual events arise.
And the best part is… they are easy to set up too!
Related: Well Planned Budget Planner
To set up sinking funds, first begin by making a list of all the events or expenses that occur in your life once a year. These events include things like birthdays, Christmas, back-to-school shopping, membership fees, vacations, etc.
Once you have this list, go through and set a budget for each event. Refer to past statements and spending to get the most accurate amount needed for each event.
Then divide that total by 12. This value will represent how much you need to set aside each month to fully fund that event.
For example, if you usually need $100 for back-to-school expenses, you will need to set aside roughly $8.50 a month to cover those expenses.
How To Keep Sinking Funds
Where you keep your sinking funds is entirely up to you but here are a few options:
1. Cash in Envelopes. If you are using a cash-based budgeting system, simply put your monthly contributions into separate envelopes, each dedicated to your specific sinking fund. Keep these envelopes somewhere safe in your home and access them when it is time to pay for the saved occasion.
Related: Printable Cash Envelopes
2. Using Ally. Ally Bank is an online banking system that has a unique “bucket” feature. This feature means each savings account through Ally has 10 buckets. As the owner of the account, you are able to create up to ten different categories for your funds. Each category can represent a different sinking fund.
3. Together in a bank’s savings account. Most banks have a limit on the number of savings accounts you are permitted to have but you could use one for your sinking funds. Simply place all of your funds into one account and keep track on a separate sheet how much belongs to each fund.
Why Do You Need Sinking Funds?
You are probably thinking… “I have a savings account already, why do I need another one?”
But the fact is, while savings accounts and sinking funds are each a type of savings, they are different tools that both serve important roles.
Related: Financial Planner for the Busy Mom
Have you ever found yourself stressed about finances as Christmas draws near? Or do you find that you overspent when it came to your child’s birthday party?
In our lives there are several events that require a bit of money from us. And if we are not prepared, these events can soon turn into stressful experiences as they drain our account more than we would like.
By creating sinking funds, you are able to experience and pay for these recurring events without the stress of wondering if you have enough money to cover your expenses.
You simply establish you budget at the start of the year and put away each money month, so by the time the even rolls around, you can be confident you have the funds to cover it.
What events in your life do you find yourself constantly overspending or feeling stressed around? Are you ready to set up some sinking funds yet?
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