Sinking funds are a great tool when you apply them to your budget at the right time.
Maybe you have been on your debt payoff journey for a while.
You’ve cut out most of the pleasurable things to pay off as much as possible.
Now you want to purchase something that you don’t need and feel a little torn between making an impulse buy or staying on track.
Sinking funds are the tool to help you make the purchase without paying interest.
You can make that purchase guilt-free through a short-term savings strategy without using credit.
Credit card interest can be as high as 20% (Forbes).
A sinking fund will help you earn interest on your money instead of paying it.
Paying off debt does not mean restricting yourself permanently.
It is ok to loosen the reins every once in a while.
Let’s dive in to see if your budget needs sinking funds!
When Would I Need a Sinking Fund?
On the surface, this may seem like a simple question with a simple answer.
As it turns out, there are a set of guidelines to use when assessing your current financial situation.
Take a look at each option below.
If your financial story does not currently meet all of these guidelines I recommend waiting until it does.
I’ll be honest, it took 3 years to get my financial life in a place where I would benefit from a sinking fund. (Keep reading and I’ll tell you why).
Does your financial life currently meet all of these requirements?
- Budgeting is a monthly habit for you
- Saving money consistently in an emergency fund
- Paid off enough debt and now have discretionary funds
- Ready to start planning for yearly expenses
- Prepared to stop using credit
- Ready to protect your current debt pay off plan
Ok the last one might sound a little weird but look at it this way.
The main function of a sinking fund is to keep your financial life on track to become debt free.
It is also a tool to help you stop impulse buys.
This is what I mean by protecting your debt pay off plan.
Can You Have Too Many Sinking Funds?
Short answer…YES!
If you google “sinking fund categories” you will see blogs that have outlined anywhere from 39 to 85 possible sinking fund categories.
Yikes, before you decide to dive down that rabbit hole, consider a less complicated approach.
Review your financial needs for only this year. Is there one item or goal you really need to reach this year?
My family currently needs a new refrigerator.
That is the only sinking fund goal I’m focused on outside of holiday savings.
Find your focus so you know what is the most important and achievable for you.
In the past, I fell through the rabbit hole.
I had anywhere from 10 to 20 different sinking funds.
Guess what happened?
I didn’t achieve a single goal that year. It isn’t practical to try to build a sinking fund for everything you want in life.
The only result you will achieve is overcomplicating your finances, giving yourself too much to track, and keeping you from your savings goal.
Learn from my mistakes and try focusing on one sinking fund to start. You will get better at it over time.
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Best Way to Build a Sinking fund While Paying Off Debt
One common question asked about sinking funds is how to do it properly while paying off debt.
Here are 5 easy guidelines to start the right way:
- Free up money by using the debt snowball
- Keep building your emergency funds (do not modify this habit!)
- Only create 1 – 2 sinking funds at most to start
- Only use extra money (discretionary funds) to build your sinking funds
- Send leftover money, at the end of each month to your sinking funds
This doesn’t happen every month for me but occasionally I’ll have funds leftover from a previous month.
Instead of rolling them over to the following month’s budget or splurge shopping.
I move the funds to my sinking funds to help reach my ending goal faster.
Tips for Success with Sinking Funds
At face value, sinking funds are easy to create. It is staying on course to continue building them that creates the challenge.
I did some deep research to find the best tips that were helpful to others when they were starting out.
Below are 8 of the best tips budgeters have successfully been using to maintain their sinking funds.
They still use them to this day!
Setup Account at a Separate Bank
You will reduce the temptation to spend your sinking funds too early if you set up your accounts at a bank separate from your checking account.
This creates a 3-day barrier for transferring funds to your checking account.
Name Your Accounts
Naming your sinking funds after your savings goal will help you keep track.
Example: One of my sinking funds is named Christmas/B-days.
This reminds me which account is designed to only purchase Birthday and Christmas gifts.
Automate Savings Transfers
If you are able to talk yourself out of saving each month an automated transfer can help with that.
Your bank will move your funds out of your account the day you are paid to help keep you on track.
You can’t spend what isn’t there.
Send Extra Money to Sinking Fund
Earlier I mentioned sending leftover funds at the end of the month to your sinking fund.
You can also save a portion of your tax refund, birthday money, or any other unexpected receipt of money in your sinking funds.
The faster you build the more accomplished you feel.
Prioritize All Savings Goals
Again, this is hammering home the concept of maintaining your emergency savings goals while working toward your sinking fund goals.
The emergency fund is a must!
Start Small
Try saving for something you need that doesn’t cost a lot for your first sinking fund.
My first sinking fund was a pair of $60.00 gym shoes I needed.
My gym shoes at the time had holes in the soles. I achieved my goal in only 3 months!
As a Beginner Only Start with One
All seasoned budgeters who currently use sinking funds recommend only building one at first.
They too fell down the rabbit hole and made money decisions they regret.
Some even quit budgeting or paying off debt for a short time because they became overwhelmed with tracking it all.
Don’t Spend Them Until Your Goal is Reached
One of the biggest temptations I still battle with to this day is seeing a really neat product or service and wanting to purchase it now.
In order to buy now, I either need to use a credit card or transfer funds from my emergency fund.
All I succeed in doing this is delaying my savings goal.
In the past, I wound up charging a $3,000 emergency on a credit card I was trying to pay off because I drained my emergency fund for non-emergencies.
More Articles You May Be Interested In:
What is a Sinking Fund and How to Use One?
How to Save Your Finances with the Debt Snowball
Pay Off Your Debt Easily and Save With the Debt Avalanche
Concluding Thoughts
The important idea to focus on is not overcomplicating your financial life.
Sinking funds are designed to help your finances.
As you build your first sinking fund odds are you won’t make it to your end goal.
That’s perfectly ok, it’s actually common.
My first sinking fund goal was for a Caribbean Cruise; the end goal was $4,800.
I still to this day have never taken that cruise. It turns out it isn’t that important to me.
Even though I experienced a failure I still succeeded.
I didn’t impulse buy and stick myself with additional interest on a $4,800 purchase.
I sincerely hope sinking funds help you succeed in failing too!
References
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