I just have to shed some light on sinking funds because they can be a true game-changer for your finances! Sinking funds are a way to save for something specific by allocating money towards the fund every month or paycheck.
Sinking funds are a great way to categorize your savings, have what you need for future expenses, and take the pressure off to pay for everything all at once. If you want to learn more about sinking funds, check out the YouTube Video below to get some more details!
6 Ways Sinking Funds Help Your Finances
#1 Sinking funds help keep your goals organized
One of my favorite things about sinking funds is that they allow you to stay on top of your savings goals. This is super helpful if you constantly find yourself saving for multiple things, at the same time or not…like I do!
I’m a firm believer that every account should have a purpose and each savings goal should have its own account. Sinking funds reaffirm this belief. Since each specific sinking fund is tied to a specific savings goal, you always know what you’re saving for.
You also know where you can pull money from if you need to. For example, a sinking fund for a vacation could be used for an emergency (assuming you don’t have an emergency fund) instead of using a sinking fund for annual expenses. Because sinking funds have different priorities, if you need to use the money from a low-priority fund, you can always replace it later.
#2 Sinking funds make paying for recurring expenses easier
Time flies, okay?! I used to always be caught off guard when my annual bills for credit card fees or car insurance would come up. “How did that happen so fast?” I hadn’t prepared my budget for it, so I was scrambling to find the money to pay the full amount.
Then, I started saving for those expenses every month. I took the annual cost and divided it by 12. From there, I had that monthly number included in my budget and moved to my sinking fund for annual expenses. I’ll never go back to scrambling again! Sinking funds truly make paying for those annual or semi-annual expenses so much easier!
#3 Sinking funds keep you motivated to budget and save
One of the reasons why I believe each specific savings goal should have its own account is because it’s motivating to see the account growing. It’s motivating to know that you’re getting closer and closer to the goal. This is why sinking funds are so inspiring!
The goal isn’t to save as much as possible, but to save what you can afford over the course of time. As my Palm Springs sinking fund grows, even though it’s not by much each month, I get motivated knowing I’m making my way to the goal. Let sinking funds inspire you to keep doing what you’re doing to get the fund where it needs to be!
#4 Sinking funds allow you to save a little at a time and still have what you need
I touched on this above, but let me go a little deeper. When you set up sinking funds, you first review your budget to see what you need to have saved and how much you have available to save. This means that you’re only saving what you truly can afford to.
Your budget includes the sinking funds, so you know that your income is covering everything it needs to, plus saving for the funds. This is such a relief. It’s also why sinking funds are so great.
You don’t have to put all this pressure on yourself or your budget to hit your savings goals. With sinking funds, you just have to know what you can afford to save for them each month and make it happen. Anything extra is extra.
#5 Sinking funds help you keep your spending in check
Because sinking funds are included in your budget, you know they’re accounted for. You know you need to save for them before you go overspend your income. When you put your money in your sinking funds each month or pay period, you’re only spending money after saving for your sinking funds.
Sinking funds follow the “pay yourself first” rule. This means you allocate your money to your sinking funds before anything else. You know you can afford to put money towards your sinking funds (thanks to your budget), so you handle it as soon as the money comes in! That means you’re only spending money that you should be.
#6 Sinking funds make you a money management master!
The more sinking funds you have that make saving for goals or expenses easier, the better you become at managing your money. It may be a little difficult when you’re first starting out, but once you get the hang of it and see how effective your sinking funds are for your budget, you’ll be just fine!
The goal is to always have what you need, and sinking funds make that happen. Sinking funds allow you to save for things effectively…and that’s what makes someone a money management master! Trust me, I’d know!
Related: The Skinny on Sinking Funds
I’m not sure about you, but having money when I need it automatically makes sinking funds valuable for me! If you’re not incorporating sinking funds into your budget, I challenge you to give it a try! Even if it’s a little bit every month, start getting into the habit of saving for things you know you’ll need. Anyone is capable of saving $5! I’d love to hear about how sinking funds help your finances. Post a comment in the section below to share how they work for you!