According to a CNBC study, Americans save less than 5% of their disposable income – the income that’s left over after all of their bills and responsibilities are covered. Saving less than 5% likely means your savings could be feeling a little dry. What about expenses you know are coming? Things like birthdays, Christmas, the inevitable car breakdown? That’s where sinking funds can come in handy. I’m going to give you the skinny on sinking funds so you can start incorporating them into your budget to save more!
What are sinking funds?
So, here’s the skinny on sinking funds. A sinking fund is a way to save money for something specific by setting aside money towards the fund every month. For example, you could have a “travel” sinking fund. You would contribute a specific amount of money, usually not much, toward that fund every month.
There are no limits on the number of sinking funds a person can have. Since most funds don’t require a lot of money to be put towards them every month, a person can have as many as they can afford. Sinking funds can be set up in cash or in a savings account. If you choose to save for your sinking funds with cash, you would assign an envelope to each fund. Label the envelope and put your cash savings in it every month.
If you choose to save for your sinking funds in a savings account, you would set up a specific account just for that sinking fund. I would suggest naming the account after the fund. You would have your monthly allotment transferred into that account every month, until you need the funds.
Why are sinking funds important?
Sinking funds are important because they allow you to prepare for expenses before they happen. You think through things you know you need to purchase or spend money on in the future, and establish your savings around those purchases.
This means that sinking funds can save you in times of need. Because you have been saving for your sinking fund consistently over a span of time, you can make the purchase worry-free when you’re ready. Sinking funds essentially give you permission to spend your money on the things you want most. There’s no better feeling!
Sinking funds also help keep you focused on the things you want most, because you are saving for them month over month. You are no longer making impulse purchases, but thinking through the things you want and putting a plan in place to pay for them, stress-free.
What’s the difference between sinking funds and regular savings?
The biggest difference is that one sinking fund is dedicated to one specific goal or expense. Without sinking funds, if you use a regular savings account, you could be using the money in your savings for all kinds of expenses. This means the money goes faster than it should, and can take a lot longer to recoup.
With sinking funds, you are creating a specific fund or account for a specific goal – there is no separating the cash in that fund. The money in that fund only goes to what the sinking fund was designed to pay for in the first place. This takes the confusion out of how and when to use your savings.
How do you start including sinking funds into your budget?
The great thing about sinking funds is that you can set them up any time! You’ll need to make sure you are familiar with your budget – paying special attention to how your income should be allocated month over month. When you know that you have income that can be allocated to your sinking funds, you can set them up successfully.
Here are the steps to take to start including sinking funds into your budget:
- Start by thinking of what your sinking funds will be
- Determine how much you’ll need to reach your sinking fund goal
- Divide that overall goal amount by the number of months you have to reach that goal
- Save that amount each month
If you don’t have enough money to save for your sinking funds, cut back your spending in other budget categories, or thinking of ways you can make more money. You can also extend the timeline of when you need the money for your sinking funds.
Remember, the goal is to be consistent with saving for your sinking funds. In order to do that, you must be realistic with what you can afford to save for those funds. Your budget plays a big role here. Make sure you are on top of where your money goes, and don’t be afraid to make changes where necessary.
Want to incorporate sinking funds into your budget? Schedule a free consultation with me and let’s talk about your plan of attack!
Related: 5 Ways to Make Saving Money a Habit
Sinking funds can be so helpful in the long run. They help us think through the things we want and put a plan in place to actually save for them. Because we are giving ourselves time, we are able to avoid putting a strain on our budget. If you haven’t given sinking funds a try, or haven’t really paid attention to how you’ve been saving, now is the time!
Do you have sinking funds set up currently? How many sinking funds are you contributing to on a monthly basis? Share your strategies and experiences by posting a comment below!