Buzz
In yesterday's article on How to Budget for Unexpected Expenses, I highlighted sinking funds as 'one of the best budgeting hacks ever,' so now it's time to dive into how they actually work.
A sinking fund lets you allocate money to a particular category in your budget, ensuring it's available when you need it. Many people automatically set up sinking funds for larger purchases like vacations, weddings, or down payments. However, we often overlook expenses like car repairs, new laptops, or gifts for the holidays.
Once you realize that the holidays come every year (whether you’re ready for them or not), you might as well start saving for them in January... this is a total game-changer for your budgeting strategy.
You have a few different options for setting up your sinking fund. If your bank allows multiple checking or savings accounts, you can easily set up separate accounts labeled ‘holidays’ or ‘car repairs’ and transfer a small amount each month. (Extra credit if you set up automatic transfers!)
Budgeting apps also let you create sinking funds and savings goals. For instance, YNAB is designed to practically push you into establishing sinking funds for everything, from birthday presents to tech upgrades, plus your yearly YNAB subscription fee.
If you're managing your sinking funds via a budgeting app rather than moving money into a separate bank account, remember to use the app as a guide for your monthly spending limit, not just the balance in your checking or savings. After all, you've already earmarked some of that money for the new smartphone you’ll need to buy next year.
When creating sinking funds, you can choose between goal-based or monthly-dollar-amount-based plans. For example, you can decide 'I need to save $1,200 for a new laptop' and stop contributing once you reach that goal, or you can set a goal of 'saving $20 each month for future tech upgrades,' knowing you’ll have to keep saving that same $20 every month forever—because new tech will always be around.
And that’s the purpose of sinking funds: there will always be new tech, there will always be holiday gifts, there will always be car repairs, weddings to attend, and annual fees to cover. Some of these expenses are rare but predictable, while others are unpredictable but easy to foresee.
Begin setting aside some money now in preparation for what's ahead.
