Sinking Funds: Your Secret To Stress-Free Spending
This month, I’m here to help you learn about a financial wellness tool with a funny name: sinking funds.
A sinking fund helps you alleviate worry and stress in the future. You know those things you pay for once or twice a year? A sinking fund holds the money for you. Want to plan a vacation or purchase a new car? Yep, a sinking fund means that money is there when you need it.
Sinking funds give you peace of mind and confidence. How good will it feel to plan and pay in full without incurring any fees (or guilt!)?
What is a sinking fund exactly??
It’s a dedicated savings strategy where you set aside small, manageable amounts of money over time for a specific expense. Unlike a general savings account, a sinking fund is focused on one goal, whether that be a large purchase, an annual bill, or maintenance and repairs.
Unlike your emergency fund, which is for surprises, sinking funds are for the expected things that can easily throw off your budget if you don’t prepare.
Why use sinking funds in midlife and beyond?
There’s a lot to juggle financially in this season of life! You may be planning your exit strategy from your career or supporting aging parents. Perhaps you want the flexibility to help newly fledged children and contribute to the causes you care about. Aside from all that, life continues to get more expensive!
Instead of scrambling to find the money in the moment, sinking funds help you manage it all with pre-planned clarity.
Use sinking funds to help you:
Align your spending with your values
Experience less guilt and more freedom
Support caregiving roles
Feel more confident in your financial well-being
How do I set up sinking funds?
There are several ways to create sinking funds, but it’s smart to start with a savings account, preferably a high-yield one. You can learn more about high-yield savings accounts in this post.
OPTION 1: If you have one savings account without the ability to set up subaccounts, use a spreadsheet to manually track how much you have in each of your designated sinking fund ‘buckets’.
OPTION 2: Use a savings account that allows you to set up subaccounts. Name each subaccount to match its purpose - these are your sinking fund ‘buckets’.
OPTION 3: Use multiple savings accounts - one for each sinking fund ‘bucket’.
*Watch this helpful video explaining sinking funds https://www.youtube.com/watch?v=TcSmd2lmc7E
When you have your high-yield savings account, choose your sinking fund ‘buckets’. Then determine the target dollar amount you want in each and how many months you have to fund them.
*Watch this video with good examples of ‘buckets’ and simple math to determine monthly savings to reach your targets https://www.youtube.com/watch?v=e4D9UKQvV8Q&t=332s
Here are some ideas for your sinking fund ‘buckets’:
Travel - save for that dream vacation
Gifts - birthdays and holidays
Health - to cover your co-pays and other out-of-pocket costs
Annual/Semi-Annual bills - like car and home insurance or property taxes
Self-Care - an excellent way to make monthly massages happen!
Car/Home Maintenance and Repairs - you know these expenses come up
Tech Purchases - for that new phone or computer
Charitable Donations - to ensure your favorite causes are supported
Be particular with how many ‘buckets’ you choose. One expert suggests a sweet spot of 5-7 with no more than 10. Whatever you choose, make the allocation as easy as possible. Set up an automatic fund transfer so you don’t have to think about it!
It’s okay to start small. Even if you sink a total of $10 per paycheck in one ‘bucket’, you are establishing a positive financial habit. Start where you are, my friend.
Sinking funds are a financial tool that set you up for success and alleviate stress. After some effort up front, you can peek at them periodically to ensure you’re on track. If you have money left over in a sinking fund at the end of the year, it’s a head start for the next one (or some extra self-care before the New Year!).
I created a 4-week challenge to help you take action without getting overwhelmed. Visit this link to download the challenge and get started with this impactful financial wellness tool!
While you’re at it, why not make your money work harder for you? Join my free MONEY MATTERS list to receive a monthly email, each with a different money-related challenge, that helps you build your money mindset and grow your personal wealth.
The purpose of this post is to provide information and education (& hopefully some entertainment!). I am not a financial, medical, or mental health professional, so please do not interpret my words as the direction of a financial planner, doctor, or therapist.
I know you're smart and will ALWAYS consult with your physician or another appropriate, accredited professional before implementing any changes to your investments, diet, medication, lifestyle, exercise regimen, supplement regimen, or health practices. After all, you're here to live well, right??
Seriously - consult with your financial or healthcare team and assess your own risk. Verify what you find on the internet. I care about you!
