About eight months ago, I was introduced
to a financial concept that has already changed my life,
this sinking fund.
Right around November, people start
saving rapidly for Christmas, Hanukkah, et cetera.
But what if you had been putting $15 or $20 a month
away for a no sweat holiday season?
This, in essence, is the value of sinking funds.
Minimize the stress you feel about
large, predictable expenses through small long-term savings
goals.
The purpose of sinking funds vary per individual,
and can be personalized to you.
So whether you'd like to save for a $300 vacuum or a $3,000
car, you can do so.
It is important to keep in mind that a sinking
fund is different from an emergency fund.
Emergency funds are meant as, you might guess, solely
for emergencies.
However, a sinking fund is used to save up
for non-emergency expenses.
For example, if you would like to have
$500 to spend by Christmas Day of 2020,
you should start putting away $45.45 this February.
If you would like $100 by New Year's Eve,
you should start putting away $10 a month this March.
Saving large amounts for the year
becomes easier the sooner you begin.
I would like to have $300 to spend
on the holidays in December.
So I have been putting $25 into a designated savings
account each month, which I started this January.
So how does it work?
A sinking fund is often created through an envelope system.
If you were saving as I did for Christmas,
you would pull out $25 from your bank account each month,
starting in January, and store it inside your envelope
in a safe location.
This is a tried and true method for many.
But I tend to prefer an online method for safety purposes.
Using a high interest savings account
means you can also put your money
to work and earn a little on top of what you'd already
be saving.
To set up my sinking funds, I went to my credit union
and set up six additional savings accounts.
Pets, $70.
Salon, $120.
Vacation, $50.
Car, $325.
Holidays, $25.
Clothing, $20.
While I already budgeted in $50 a month for my dog's needs,
I have also set up a sinking fund of $70 a month
for his medical expenses.
I can't always know when an issue might arise
and he will need veterinary care.
So this sinking fund gives me peace of mind.
I get my hair dyed once every two months,
and cut once every three months.
So my salon sinking fund allows me to make those purchases
with no sweat.
Previously, I struggled to properly allocate these funds
in my regular monthly budget, because I did not
like storing them in my typical checking account.
For me, it is easy for my checking account funds
to just walk away.
While vacation is not a category I am aggressively
saving towards, I still like to put $50 a month towards it
for when opportunities for travel arise.
My car fund is by far the largest sinking
fund I have, at $325 a month.
This monthly savings account is designed
to include my yearly car insurance
costs, registration fees, and any unexpected repairs.
My car fund does not include regular monthly expenses,
like gas.
That comes out of my regular everyday spending.
My holiday sinking fund is used to save up
for my major holiday spends, Christmas and New Year's Eve.
Lastly, my clothing sinking fund is a low priority fund
that I use to put away for big purchases.
I have been eyeing a pair of athletic leggings
to use for my boxing classes for a few weeks now.
And if I decide to purchase them,
I will be using the money from my sinking funds.
A sinking fund is perhaps most important
for expenses that are likely to come,
but difficult to predict the timing of.
For example, a veterinary bill, high medical copay,
or car repair can easily force you to swipe a credit card.
By preparing for these expenses throughout the year,
you can prevent yourself from the last minute
money scrambling that so often leads to debt.
Sinking funds are especially useful on very tight budgets.
If you are on a strict budget or limited income,
you likely do not have a whole lot
of wiggle room for unexpected expenses,
making you vulnerable to debt.
Packing even just a few dollars away
for each of your major sinking fund categories
will provide the necessary safety
net that may be harder to build up as one large lump sum.
Start with $10 a month towards the area that you think
may be most likely to come up in the future.
Are your car's tires starting to go?
Are you expecting any medical procedures in the next year?
Is a holiday with expenses coming up soon?
These are the questions to ask yourself now.
While having an emergency fund in place is smart.
It is not wise to constantly have
to dip into it for predictable, not actual, emergency expenses,
and then have to build your emergency fund back up.
This not only relies on your ability
to quickly replenish your funds, but also
leaves you vulnerable during the moments
after you have depleted your emergency fund.
If building sinking funds for every major need
seems overwhelming, start with just one,
and build out from there.
The two sinking funds that I suggest everyone
have are for a car, if you own a vehicle,
and for taxes, if you expect to owe at the end of the year.
You can save yourself a lot of hassle.
When I was living in New York on a pre-tax salary
of $40,000 a year in budgeting for the first time,
I failed to address Black Friday and Thanksgiving in my November
budget.
That threw me off by $173, an amount
that can be extremely hard to make up on a tight income.
Now that I have sinking funds in place,
I feel confident in my ability to address
the financial obstacles that might come up on the road
ahead.
The practice of creating these accounts
has decreased my financial stress
and increased my confidence, and in just a matter of months.