SINKING FUNDS ALLOW YOU TO SAVE UP FOR PLANNED EXPENSES. YOU CAN USE SINKING FUNDS FOR ALL SORTS OF REASONS LIKE CAR INSURANCE PREMIUMS, FAMILY VACATIONS, HOME REPAIRS, ETC. WHEN YOU MAKE THE DECISION TO USE SINKING FUNDS, IT SAVES YOU FROM DIPPING INTO YOUR EMERGENCY FUND OR RAILROADING YOUR BUDGET.
WANT TO KNOW WHEN YOU SHOULD USE A SINKING FUND?
Now that we’re exactly 4 months away Christmas, this is a perfect example of what a sinking can fund be used for. Let’s say that you’ve already decided that you want to spend $500 for buying gifts. From now you can set aside $125 each month to cover that planned expense. The alternative to not doing this could mean using your credit card (which will only rack up more debt at a high-interest rate) or sacrificing other crucial parts of your budget to cover the cost of gifts and other expenses that come along with the holidays.
The good thing about sinking funds is that you can start at any time. The main goal is to decide which items you need a sinking fund for and approximately how much money you would need to cover those expenses. After that you take the total amount of money to be spent and divide it by the remaining months left until it needs to be paid.
HOW DO SINKING FUNDS DIFFER FROM EMERGENCY FUNDS?
Emergency funds are for the “ahhh shucks” moments in life. These are events that you didn’t see coming such as catching a flat tire on your way to work and having to replace it. On the other hand, sinking funds are for known expenses. For example if you just paid your car insurance this month, then in September you can start a sinking fund to pay the insurance premium next August.
WHAT’S THE DIFFERENCE BETWEEN SINKING FUNDS AND A SAVINGS ACCOUNT?
Savings accounts are for bulking up cash that you aren’t necessarily looking to spend in the near future. Sinking funds are just the opposite of that. You know exactly what you’re saving for and that you will be spending the money. In a savings account, you would expect to see funds grow; in a sinking fund, not so much, because you have intent for the money.
WHERE SHOULD YOU KEEP MONEY FOR SINKING FUNDS?
Sinking funds must be kept in a place where it’s easily accessible and safe. If you’re saving up to buy a new cellphone, then it would be fine to keep the cash in an envelope somewhere at home. If you live with others, make sure don’t announce where the envelope is. That way people won’t be tempted to ask you for money just because they know you have cash lying around the house. However if you’re saving to buy a Japanese car next year. which would be at least a couple thousand dollars; it would be best to place it in a savings account at a local bank. Make sure you choose an account with low maintenance fees to avoid eating away at your cash.
WHAT’S STOPPING MOST PEOPLE FROM CREATING A SINKING FUND?
Just a little bit of planning, patience and to be honest life it’s just plain rough some times. But if you know that you have annual expenses to handle, try to save even $10 or $20 toward it each month. That’s less money you have to worry about when the actual expense arrives. These banks are hoping that we swipe our credit cards or take out consumer loans for these expenses. But say it with me: THEY WILL NOT GET ME NEXT YEAR. Oh no they won’t! Find a way to wiggle this line item into a budget and let your future self thank you later.