Sinking Funds Insider: Everything you need to know

Sinking funds may be one of the greatest, and most slept on, financial tools of all time. However, it is the most undervalued tool because we are impatient! I’m guilty too, sis. The satisfaction of instant gratification makes people run far in the other direction from methods like this. So what is?

In this article you are going to learn:

• What are sinking funds?
• Why do people use them?
• How can they help me?
• Where do I start?

5 Minute Read

What Are Sinking Funds

Sinking funds are just savings accounts to put it simply. A more specific sinking fund definition is savings accounts with a purpose. Meaning, there is a finite day, specified amount, and a particular item that you are saving for. Saving for large purchases means that you can actually afford the item you are purchasing. Paying for it over a span of time is much like using services like Klarna and Afterpay. You feel better about it because you aren’t seeing the impact at the time of purchase. This is like those services, except the other way around.

Things you may use a sinking fund for:

1. New car
2. Down payment on a home
3. Furniture purchase
4. Electronics (laptop, tv, phone)
5. Insurance premiums (home or auto)
6. Gifts (birthdays, holidays, other special occasions)
7. Vacations

Why Do People Use Them

There are many reasons people use sinking fund strategies. Two primary reasons are either they don’t have the money to purchase it on the spot, or they have the money but it wasn’t a purchase they were planning on making and they’d rather not spend that much on the item at that time.

Regardless of their reasons, these are great tools to have in your financial belt. This is especially true when you are following a budget. Let’s say your budgeting because money is tight or you’re trying to throw as much cash as possible at old debt. You are not going to want to ruin all your progress with a large unplanned for expense, especially when it isn’t a necessity right away.

How Can Sinking Funds Help Me

Sinking funds provide financial stability and peace of mind by allowing you to proactively save for anticipated expenses. By planning ahead and consistently contributing to your sinking funds, you can effectively manage your finances and avoid being caught off guard by large or unexpected expenses.

Sinking funds are for you if any of the following is true:

• You make impulsive decisions followed by regret
• You want to get serious about budgeting
• You have upcoming *expected* expenses

But I Live Paycheck to Paycheck

And so do a lot of other Americans. Setting up sinking funds on a tight budget like living paycheck to paycheck is challenging, no doubt about it. However, it’s still possible with careful budgeting and prioritization. Here’s a step-by-step approach to help you establish a sinking fund in this situation:

1. Assess your current financial situation: Start by evaluating your income, expenses, and debt obligations. Take a close look at your spending habits and identify areas where you can cut back or reduce expenses. For myself, as an influencer, I spend a lot of money on Amazon purchases with little payout right now. Influencing and blogging are a priority for me but I can take a break from affiliate marketing and focus on other streams of income for my business as a priority.
2. Prioritize your sinking fund goals: Determine the sinking fund importance based on your needs and financial priorities. Sinking fund examples could be an emergency fund, car repairs, medical expenses, or any other foreseeable expenses. Remember though, a sinking fund vs. emergency fund is usually timeline driven and purchase specific. How to prioritize sinking fund goals can be based on the timeline of each. Choose one goal at a time to avoid feeling overwhelmed.
3. Create a realistic budget: The word of the day here is *realistic*. Develop a budget that takes into account your income, necessary expenses (rent, utilities, groceries), debt repayments, and some personal priorities. Then allocate a small portion of your income to your sinking fund goal. Even if it’s a small amount, consistency is key.
4. Reduce unnecessary expenses: Look for ways to cut back on discretionary spending. Analyze your spending habits and identify non-essential items or services that you can temporarily eliminate or reduce. Redirect those funds towards your sinking fund.
5. Increase your income: Explore opportunities to increase your income, such as taking on a side job, freelancing, or selling unwanted items. Though it can be difficult as a mom, try to get creative. The extra income can be directed towards your sinking fund, accelerating your progress.
6. Automate your savings: One of the best sinking fund savings tips is to set up automatic transfers from your paycheck to a separate savings account dedicated to your sinking fund. This ensures that the money is saved before you have a chance to spend it elsewhere. If you’re wondering how to create a sinking fund, consider a high-yield savings account. Bankrate is great for recommendations, and NerdWallet gives real-time month-by-month rates!
7. Start small and increase gradually: Begin with a modest monthly contribution to your sinking fund, even if it’s just a few dollars. As your financial position improves, gradually increase the amount set aside each month. The key is to establish the habit of saving regularly.
8. Stay committed and adjust as needed: Stick to your budget and savings plan, even if it feels challenging at times. Remember your why, this season is only temporary. If unexpected expenses arise, adjust your budget temporarily to accommodate them while still maintaining your sinking fund contributions.
9. Celebrate milestones: Acknowledge and celebrate your progress along the way. This is well-known sinking fund best practices. Each milestone reached, no matter how small, is a step closer to your financial goals.

Finally, remember that creating a sinking fund for living paycheck to paycheck requires discipline, commitment, and a lot of times sacrifices. Be patient with yourself and stay focused on the long-term benefits of sinking funds. Certainly, over time your sinking funds will grow, providing you with greater financial security and peace of mind.