What The HECK Are Sinking Funds?
Today we’re going to talk about sinking funds and how to use them! Do you remember being a kid and asking your parents for a toy? Or to go do a fun thing like see a movie or go to the amusement park? What did they say most of the time? “Save your money.” So you grabbed an old coffee tin or a tissue box and any money you came across went straight into that container. Your weekly allowance. Mowing lawns. Washing cars. You did whatever you could to save your money for what you wanted. Fast forward to being an adult, and you have to buy Christmas presents for your friends/family/co-workers. Because you already blew your savings having to get routine maintenance on your car, you swipe your credit card and now you’re making payments onto the credit card for months afterwards because you weren’t prepared. How can you prevent this in the future? You create a sinking fund.
But what the heck is a sinking fund?
A sinking fund, in plain terms, is an intentional saving of money every time you get paid to be ready for expected and planned expenses. In other words, you know what’s coming, and you’re being proactive with your money so you don’t have to waste your savings/emergency fund, or even worse, swipe your credit card.
A few examples perfect for sinking funds:
- Routine car maintenance (oil changes, tire rotations, tune-ups, etc)
- Back to school supplies
- Any other big expense you know is coming up
“But Cat, isn’t this the same thing as an emergency fund?”
A sinking fund is for something you know is coming, where as an emergency fund is there for things you don’t see coming. Christmas is NOT an emergency. It’s the same day every year, you know it’s coming. A car accident is something you DON’T see coming.
Sinking funds give you ease of mind for what you know you need to prepare for. Purposefully setting aside money will keep you aligned with your goals, and it might even help you set even MORE goals. If you know you have a big Christmas coming up, it could encourage you to cut your spending even more!
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I encourage you to begin making sinking funds now. If you have an online bank like Capital One, create an extra account just for a sinking fund. If you have a traditional bank, withdraw some cash to put in an envelope and put it away so you’re not tempted to spend it. Every time you get paid, just put aside more cash, until you get what you need! When the time comes to use it, you are ready and prepared and worry-free!
What other finance questions do you guys have that I can address? Sound off in the comments below! Have a great weekend!