One way to do that is by planning for large or expected future expenses by creating sinking funds.
What is a sinking fund you may ask? Keep reading to find out.
What is a sinking fund?
A sinking fund is created by setting aside a specific amount of money on a regular basis over a period of time regularly, to prepare for an expected and planned non-typical purchase you anticipate.The difference between a sinking fund and an emergency fund
If you have an emergency fund you may be wondering why you need a sinking fund. The reason is it’s different from an emergency fund because both have different purposes.An emergency fund is meant to be used for unknown unexpected expenses, things like having to go to the emergency room or a job loss.
A sinking fund is for planned expenses. Things that you know you will need to buy or pay for in the future. These can be one-time expenses or recurring expenses.
Sinking funds can save you money in the long run because you’re less likely to panic and pay more for something or have to use debt and pay interest. When you have a sinking fund you are less likely to rack up debt for things that you could have paid cash for
I share more about sinking funds in my post What Are Sinking Funds And How To Set Them Up.
How I use sinking funds
I’ve started some sinking funds for certain things that I know I will have to spend money on this year. I have a sinking fund for car maintenance, gifts, vacations (if I’m going to be taking a big one), and home repairs since I own a house.I include my allocation to the sinking funds by having a line item for each in my budget. I don’t have different savings accounts for each fund. All of the money is in one account but the way it’s tracked in my budget helps me to see how much money has been allocated to each fund.
Sinking fund ideas
Are you sold on creating some sinking funds this year? If so, don’t worry about trying to figure out what you should be creating the funds for because I’ve compiled a list of some of the common ones.Car maintenance
This is one that anyone with a car should have especially if you have an older car that will need more care to keep it running.Holidays
If I could count the number of times people said they overspent for a holiday I would be able to retire. The holidays are easy to save for because you know when they will happen every year.To help keep your holiday budget in check and not feel compelled to dip into the emergency fund or pull out the credit card, save a little each month for holidays like Christmas, New Year's, Thanksgiving, and Halloween.
Gifts
If you buy a lot of gifts throughout the year for birthdays, weddings, showers, or other occasions. If you even anticipate needing or wanting to buy gifts this year, start a sinking fund for them.Home repair or renovations
If you’re a homeowner you know there is always something to fix or update. And home repairs and renovations are always expensive. By having a sinking fund you’re able to save up money to cover these costs and not need to dip into your emergency fund even if they feel unexpected like a roof leak, broken appliance, or HVAC replacement.Related read: 5 Hidden Costs Of Buying A House
Lawn care
This is another one for homeowners. It may seem like an odd one because if you have someone regularly mowing your lawn you can just put it as a line item in your budget.Where a lawn care sinking fund comes in handy is for seasonal care like seeding and fertilizing whether you buy the products yourself or will pay someone else to do it.
Also if you live in an area that has a lot of storms and you have trees around your house it may not be a bad idea to save up in case you need to pay to have any broken trees or limbs removed.
Back to school
Just like holidays, back to school happens at the same time every year and it’s also a big shopping time for families with kids. So you don’t overspend this year, set a budget, and start a sinking fund to save up.Car replacement
With the cost of cars these days and higher interest rates, having a car loan isn’t as attractive as it used to be. An alternative is setting up a sinking fund now before you need to replace the car. That way you’ll have a lot of money to either put towards the purchase or be able to pay completely in cash.Related read How To Afford A Vacation Without Going Into Debt
Other things it may be good to set up sinking funds for are
- Vacations
- Pet care
- Health care (e.g. medical, dental, or vision expenses)
- Clothing
- New furniture
- Insurance (e.g. renters, home, car, etc.)
- Utilities
- And more!
What to do with leftovers in a sinking fund
If you get to the end of the year and you have some money left in your sinking fund you have a few options- You can roll the fund over to the next year. This makes sense for funds for things that will be needed year after year like car maintenance, home repairs, utilities, and insurance just to name a few.
- You can put the funds into savings or other funds. For instance, if you were saving for some new living furniture, you were able to get a discount on the furniture and buy it for less than what you had in your fund. Unless you’re going to buy furniture again next year, you don’t need this fund anymore and can move the remaining money somewhere else.
What sinking funds do you have or will create this year?
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