Plain and simple sinking funds can be a lifesaver, here’s why.
Sometimes in life, we are handed unexpected circumstances that require funds at a moment’s notice. Often times these circumstances are in the form of emergencies that we didn’t know was coming. To ease the stress in these situations you can resolve the problem before it happens by creating an Emergency Fund.
Aside from our regular expenses, there is a totally different type of expense we often are faced with in life, these time are when you should use your sinking funds. Honestly, before starting this blog, I had never even heard of sinking funds, never mind knew what they were for! But now that I do I am a believer and am hooked and passionate about sharing how to use and create sinking funds with EVERYONE.
The key to being prepared for expenses in advance is UNDERSTANDING sinking funds, and I am here to do just that for you. I am going to not only teach you what sinking funds are but also how to use them effectively. I know you are probably a busy person with not a lot of time to spare all at once, so I recommend you pin this pin for later, so you are able to look back at it multiple times at your leisure.
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A Beginners Sinking Funds GUIDE
So how can you implement something you know nothing about…you CAN’T! So first off I am going to explain exactly what a sinking fund is so you can understand fully, let’s dive right in shall we!
You should think of sinking funds as your safety net. A sinking fund is a nice chunk of money you save for a specific circumstance or purpose in mind, and you can only used this money for that one purpose and that one purpose only! That includes life’s ups and downs, and what-ifs, as long as you save for with intention.
Sinking funds are no doubt a great way to save and are not nearly utilized or known as much as they should be. They are a great way to save for a specific event that you are aware of each year or every couple of months.
A couple of examples are as follows
- Car Repairs
- Home Repairs
- The Unexpected
- & More
For the purpose of painting a picture say On average you put aside $85 a month because your annual cost for home care and maintenance is $1,020. Essentially this means you will have a nice chunk of change to pay for your home expenses without going into debt, this will ease money stress immensely.
Why Sinking Funds Are Brilliant
We are human this means we naturally spend a lot of time reacting to things around and as well as circumstances. We react to one another, we react to our phone sounds, and we react to the weather daily, but for so many of us we don’t want to be reactive to our finances instead we choose to be asleep financially and remain clueless! (*facepalm*
Opposed to saving for the unknown we choose to take the reactive path when we need money fast in the form of credit card debt. Rather than react proactively and plan ahead before we are desperate financially.
Sinking funds give up the ability to be proactive instead of reactive. Planning for the future is easy and yet the smartest thing you can do, instead of just hoping nothing major happens. Becoming proactive is a major quality that many people lack these days, however, it is a huge quality for those people who are financially successful. Adopting this quality for yourself will set you on the right path for future financial security and success.
Setting Up Your Sinking Funds
Where are you going to keep your money? That is the first thing you should figure out once you decide to start implementing sinking funds. There are a few guidelines you should follow when it comes to where you should keep your money.
- Must be easily accessible, it always has to be available to you with easy access, if you need to use it. It should also be in an account where there are no penalties for withdrawing your money “early”
- NEVER leave your sinking funds in a high-risk investment where you can lose it all. The reason why is because this money was set aside and saved for a purpose and you do not want to lose it.
A regular savings account is the best option for holding sinking funds. The reason why is because it is super easy and convenient to take the money out when you need it. You also can’t lose your money in a savings account which is perfect, also savings account generally have an interest rate (not a great one but it is better than nothing.)
Now all you need is a good budget because it is very difficult to continue adding to a sinking fund if every dollar doesn’t have a purpose. I recommend signing up for my 5-day budgeting e-course to gain some insight into how to budget that is effective. Having a solid budget can make sinking funds much simpler and your life easier.
All you gotta do is start by putting money into your chosen sinking fund and add an item to your budget, for each sinking fund you choose to create.
How Much Should You Put In Monthly?
The amount you put in depends solely on when the event COULD occur, and how much it could set you back. Say if you are planning for an expense that happens annually, you are able to put away much less each month. Whereas if it is something that may happen tomorrow, you may want to start by adding larger amounts so you have your safety net quicker.
An amazing aspect of sinking funds is once you hit your goal amount you can immediately stop funding it entirely.
For example, if you need $1,000 in your travel funds once you hit that mark you can stop adding to it and use that $75+ on your next most important sinking fund.
What Are Some Examples Of Sinking Funds?
This isn’t an end all be all list of every sinking fund you’ll ever want or need, as each and every one of us has different needs and financial circumstances.
One person may need a blogging sinking fund, for all blogging entails to be successful, while someone else may need a sinking fund for new equipment as a construction contractor. I have developed the list below of a few examples of sinking funds that are pretty universal and most people would feel are necessary.
# 1 Dogs/Cats/Horses/ETC. Expense
We never want to think about our pets becoming old and growing sick, or even passing away. It’s like a stab in the heart and lump in the throat feeling when you start thinking about your animals passing, they become FAMILY. But unfortunately, the reality is our precious pets are not invincible. And when something happened to them we want to be prepared for whatever they may need.
Having and caring for a pet is not cheap, it can actually become insanely expensive. So this emergency money can go towards anything to care for your pet, including annual check-ups, medication, new accessories, and dog food.
# 2 Home Repairs
If you are a homeowner then you know sooner or later you will have to fix something. It could be something small, like a new light bulb or faucets, but on the other hand, it could be something much bigger (more expensive) like a new roof, which can cost thousands! As a homeowner, you never know what is going to happen and it is always SMARTER to prepare ahead instead of dealing with it at the moment.
Home repairs can hit at any moment and there is generally no way to tell exactly what they will be. Repairs add up quickly, and having the money in the bank to pay for them can dramatically change how you treat your home and reduce your stress levels of the what-ifs.
#3 Technology Expenses
If you are anything like my husband then you’ve dropped your phone (or multiple….) and cracked the screen or completely demolished it. Another possibility is the dreaded laptop frying that happens when you spill water on it…(speaking from experience it will smoke…) and there’s really no way to come back from that. Some of your most relied upon devices can become unusable at a moment’s notice.
Putting a $1,000 phone or $2,000 laptop on a credit card is not a smart option, but when you need your lifelines what is the other option? Sometimes it is just the only option.
This is why technology sinking funds are SOOOO important! A technology sinking fund could replace your security cameras, an Apple Watch, headphones, laptops, cell phones, etc.
#4 Travel Expenses
Travel can mean fun travel or the not so fun mandatory unexpected travel. Of course, lots of people set up travel funds for an annual family vacation to relax and enjoy. But, the actual travel sinking fund you should be prepared for is funeral/sickness/emergencies. This may sound super probed and depressing to even consider thinking about, however, when tragedy strikes you won’t have to think twice or stress about funds.
The harsh reality is we never know when a family member may pass away or become sick. Often times these circumstances occur at a moment’s notice, and you may need to travel across the country or maybe even across the world to attend the funeral and to support and take care of your family.
If you’ve ever flown then you know how pricy a plane ticket can be, when you don’t have the time to shop around for deals. It is a great idea to have at the very least $1500 saved up for circumstances such as these, that last thing you need to be stressed about I money when you have to get to your family.
#5 Car Repairs/Maintenance
Choosing to own a car can mean paying to throw your money at a box of metal on wheels. I think it is pretty universal that car repairs SUCK.
If you plan on owning a car in the future or currently own a car planning for repairs is a no brainer! You will need those funds eventually. It is one of those expenses that is non-negotiable.
Now, what can you spend your car funds on…some examples include your yearly registration, tickets, floor mats, oil changes, and any repairs that occur. You can pretty well spend these funds on anything that involves your car.
Sinking Fund Example
Let me walk you through a quick possible scenario to show exactly how sinking funds work.
Sarah is a young single woman and knows she is going to need new tires in about a year for her car. She has done the research for the ones she wants and got a quote for $800. Let’s just say she is really on the ball and great planner so she allows herself 12 months to save for new tires instead of putting in on her credit card and carrying a balance.
If she starts saving now it would be $67 dollars a month now instead of $800 all at once.
When you think of making a big purchase like new tires as saving per month it can make affording your needs much less stressful.