Codename: The Stash
Fellow Dollar Detectives,
Do you have events that seem to just pop up every year, like birthdays, anniversaries, Christmas, and so on? As of result of these events, do you feel like you aren’t financially prepared or that you are surprised at how fast these events arrive? Well, if you are like me then you answered Yes to all of these questions. But fear no more, the solution to our problem is called Sinking Funds.
What is a Sinking Fund?
A sinking fund is a savings account set aside specifically for a future expense. The name “sink” comes from the fact that you are establishing small regular contributions that build up until you reach your desired amount. You may be thinking this is just an emergency fund, but the key difference here is that sinking funds are for PLANNED or EXPECTED costs.
Benefits of Sinking Funds
The primary benefit of a Sinking Fund is that when the expense comes up, you’ll have the money set aside. This eliminates the need to rely on credit cards or dip into your emergency fund. There are few other benefits to be aware of as well:
Less Financial Stress: By saving ahead of time for expenses, you reduce the amount of last minute issues that arise when bills or unexpected costs arise.
Smooths Out Spending: Sinking Funds spread out the financial burden of big expenses over multiple months, making your budget more predictable.
Efficient Budgeting: Setting aside money for specific categories allows you to know exactly where your money is going.
Creating a Sinking Fund
Identify Goals: List the expenses you know are coming up.
Determine the Cost: For each goal, estimate the total amount you’ll need.
Set a Deadline: Decide when you’ll need the money.
Calculate Monthly Contributions: Divide the total amount needed by the number of months until your deadline.
Open a Separate Account (Optional): It can be helpful to keep these funds in a separate account to avoid mixing with your discretionary spending.
Automate Contributions: Set up monthly transfers to avoid spending the allotted money before saving it.
Track your Progress: Check progress regularly and adjust as needed.
How I Use Sinking Funds
To give you a real-world example, here’s how my family uses sinking funds in our finances:
Homeowners Association Dues: Our homeowners association dues are due annually so we divide the total amount by 12 months. We then place that money in a separate High Yield Savings Account.
Home Maintenance: For home maintenance items such as air filters, water filters, and miscellaneous maintenance expenses, we estimate the total cost and divide that by a set number of months. We place these funds in a separate High Yield Savings Account as well.
Birthdays, Anniversary, Etc: Similar to the Homeowners Association dues, we calculate the total cost and divide the amount by 12 months. These funds are then placed in our regular savings account.
Final Thoughts
Sinking funds are a simple method to help you stay on top of your expenses and make room for things you enjoy. Whether it’s a vacation or buying Christmas gifts, you will not be caught by surprise by those events that seem to come before you know it. That’s all for today Dollar Detectives, keep sleuthing those dollars!