Sinking funds. You have likely heard of them and thought maybe they are a new buzzword floating around for savings. But it can actually be a helpful tactic for your savings and help to manage your money more easily and avoid overspending.
What Are Sinking Funds?
Sinking funds are small savings pots that are created for a specific purpose, so you don't have to dip into your emergency savings fund, find money in your monthly expenditures, or even go into debt to afford things.
Sinking funds need to be created for designated spending, and if you don't spend that money, you can reallocate the funds, spend them or keep them towards your other savings goal, or use the money to put towards something else.
You can have as few or as many as you think you might need, and all of them can be tailored to different amounts.
How Much Do I Need In My Sinking Funds?
This is entirely up to you and your circumstances. Each sinking fund will have a specific purpose, meaning it will have an amount you deem necessary to save towards. Let's say you are saving towards car repairs, and last year, you spent $500 on various parts or maintenance for your auto. For this year, you can aim to put away $500 to cover those expenses as and when issues crop up.
There is no one set amount that is too big or too small; simply what you think is appropriate for what you are saving towards.
How Can I Set Up Sinking Funds?
The best options for sinking funds are high-yield savings accounts. Keeping your funds in your checking account that's linked to your debit card can be a recipe for disaster if you are prone to impulse spending or exceeding your budget. Investment accounts won't work either, as you might find you are withdrawing money frequently, so you end up at a loss thanks to taxes and inflation.
You will find the majority of banks offering high-yield savings accounts don't have brick-and-mortar locations, so you can set up an account and link it out to your checking account for easier deposits into the account.
What Can You Use Sinking Funds For?
Anything and everything. Essentially, these are a buffer to avoid you going into debt or struggling financially for unexpected or out-of-pocket expenses. So you can set up a sinking or one or more of your expenses.
Common sinking funds include the following.
Home Repairs and Maintenance
Experts suggest homeowners should aim to have at least 1% of the projected property value in savings for repairs and maintenance. If your home is worth $250,000, then you need at least $2,500 set aside per year for the general upkeep of your home. This can be for things like calling an HVAC company like Hooley Heating and Air Condition for an hvac repair, plumbing issues, wear and tear, damage to walls, wooden flooring or fittings, electrics, and anything else.
Home upgrades can include things like updating the decor and flooring, getting new appliances, adding an extension, landscaping, a new roof, and so on. Anything that you have plans for or want to carry out outside of regular repairs can be saved in a sinking fund. You can set a realistic target to aim towards over a more extended period of time, and you can even transfer other unused sinking funds at the end of each year if you don't use them to help boost the pot.
It doesn't matter if you travel once per year or multiple times a year; having a designated sinking fund for vacations means you can always have something in the bank to help you go ahead and book. You can have one fund for paying for the trip itself and one for the spends, or you can keep them both in the same fund. It's up to you, but if you like to be able to book a good deal when you see one or always have a vacation booked or planned, then you need a sinking pot just for this purpose.
Much like the home repairs above and as mentioned earlier in the host, cars can be money pits, especially older vehicles. If you notice you are constantly forking out for repairs for your car, or you worry about how you would afford major maintenance should anything go wrong or you have an accident, then choosing an automobile sinking fund is a great idea. It can be solely for repairs and maintenance only, or it can cover fuel and cleaning costs, too; it's up to you. But having dedicated funds for your car can be a lifesaver in an emergency if you rely on your vehicle to get about.
Sinking funds don't just need to be for boring things; they can be for fun things, too. Like your vacations above, days out, activities, adventures, pampering, and so on can give you something to look forward to. But they can also be massively expensive, especially if you have kids. Putting a small amount of money away for treats, gifts, paying for days out, spa visits, concerts, and so on can help you to afford to do nice things without breaking the bank, not paying bills/taking out loans to cover the extra expense.
Lastly, a good idea for a helpful sinking fund is to have one for birthdays and celebrations throughout the year. Mother's Day, Father's Day, births, weddings, Christmas, Thanksgiving, and so on can be expensive occasions, so putting money aside to build up to pay for them while sacrificing anything else or putting it on your credit will serve you well in the long term. Look at how much you typically spend on these types of expenses throughout the year and set a regular amount to leave your main account and transfer into this sinking fund to give you a nest egg to use at each and every event you need to celebrate through the year.
Sinking funds can be a useful saving strategy and a way to avoid using your emergency savings for run-of-the-mill purchases. Your emergency savings should be for exactly that: emergencies (losing your job, illnesses, injuries, and so on). Sinking funds can take the pressure off your emergency fund and allow you to budget your money so you can still afford everything you need without struggling to find the funds when they crop up.