Sinking Funds: They’re Not as Difficult as You Might Think
Sinking funds can help bring peace of mind to your budget. It allows you to have money when you need it. Here we’ll discuss the ins and outs of sinking funds to help you get started.
What Are Sinking Funds?
Simply put, a sinking fund is setting aside a small amount of money on a regular basis. The money is saved for a specific purpose and grows over time. Once you have hit your goal, your fund is considered “fully funded.”
The benefit is you can save a large amount of money by taking baby steps and saving just a little bit at a time. Then, when it’s time to pay the expense, you have enough money saved up and it relieves the burden of trying to find extra money in your budget.Sinking funds take dedication and you must resist the urge to spend the money. Just remember that it already has a purpose so you shouldn’t spend it unwisely.
How to Create Sinking Funds
1. Set a goal. Decide what you are going to save for and how much you need.
2. Set a deadline. When will you need the money by? Create a deadline for your goal.
3. Set aside money from each paycheck. We’ve found it helpful to divide your goal by the number of paychecks you will get until your deadline.
This divides the goal amount into as small of savings amounts as possible. It makes it easier when you only have to come up with a small amount of money than trying to pay for a large expense all at once.
How Much Should I Save?
Depending on your needs and your goals, you can calculate how much to save from each paycheck.
Goal: $1,000 for Christmas
Deadline: Thanksgiving (so you can be prepared to shop well before Christmas)
Amount to save: Hopefully you are starting well before Christmas. Let’s start in January and assume we get paid twice a month. In this case, you’d have 20 paychecks between January and Thanksgiving.
$1,000 / 20 paychecks = save $50 per paycheck
Now when Christmas comes around you don’t have the burden of trying to come up with a large amount of money all at once and straining your budget.
By saving a small amount each paycheck, you’ve successfully paid for Christmas without breaking the bank and without going into debt.
What Can I Use Sinking Funds For?
There are many expenses that creep up on you throughout the year.
I like to create sinking funds for anything that is a yearly or semi-yearly expense. If it is going to cost me more then $100 or put strain on my paycheck budget, then I’ll create a sinking fund for it.
Sinking Funds for Alligator Expenses
At Triggator, we like to call these non-monthly expenses “Alligator Expenses”. That’s because they lay dormant for long periods of time. In the back of your mind, you know they are there, but suddenly the day comes that you have to make a big payment and you have an “Oh crap!” moment. You find yourself shuffling money around to try to pay for it.
A few examples of Alligator Expenses are:
• Annual Subscriptions (gyms, kids sports, annual fees, Amazon Prime, etc.)
• Car Maintenance (registration, tires, oil changes, etc.)
• Taxes (if you owe annually or quarterly)
This list can keep going and you’ll likely have expenses unique to your family. It can be helpful to go back through your bank statements (or credit card statements) and find things you pay for annually or only a few times a year.
Managing Multiple Sinking Funds
If you find that there are several categories where you’d like to start sinking funds, you’ll want a good way to keep track of that money.
This money already has been claimed, so you won’t want to spend it until your “alligator expense” shows up. There are a couple popular ways to save and track this money
Write the name of your goal on an envelope. Create one envelope for each item you are saving for. Every time you get paid, make a quick stop at your bank or ATM and withdraw the amount you need to save. Divide up the money and put the designated amount into each envelope.
Another option is to transfer the amount you need to save into a designated savings account on payday. Some banks, like Ally, will let you divide your savings into “buckets” that you can name however you want.
Our online budget app is designed with Alligator Expenses in mind. Triggator will allow you to enter your goal and deadline and will add a line item to your budget to save for Alligator Expenses. It will calculate how much you need to save each paycheck to reach your goal and remind you when these bills will come due.
You can also link Triggator to your savings account to help you know if you are on track to reaching your goal and having enough to pay for your Alligator Expense.
You can try Triggator free for 30 days will all it’s amazing features.
Emergency Funds vs. Alligator Expenses
While you can definitely use the sinking fund method to save for an emergency, emergencies and Alligator Expenses are not the same thing.
An Alligator Expense is something you know you will have to pay for. It’s sitting there waiting for its due date (or feeding time!)
An emergency is an unforeseen expense. You know these will happen too, but you just never know when or what you will have to pay for.
Related Article: The Quickest Way to Save for an Emergency
Car maintenance should not be paid for from your emergency fund (unless you don’t currently have sinking funds). If you own a car, you should know that you will eventually need new tires and breaks, etc. This is an excellent example for using a sinking fund.
Creating sinking funds for your Alligator Expenses can alleviate strain on your budget as a whole. You’ll have more money set aside for your true expenses and should find more peace of mind when it comes to your budget.
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