My Sinking Fund Method – My Secret to Saving for Everything
Have you heard of sinking funds? Sinking funds could be the number one game-changer to your personal finances. This little money hack will provide you with a clear way to save money and actually trick yourself into saving more. Learn how to use my sinking fund method to change your finances today.
Sinking funds help you set savings goals for specific purchases and can be turned into automatic savings so you don’t have to think about it.
Are you in debt? Around 80% of Americans are currently in debt according to a 2018 study by Comet. It is no wonder saving money is difficult and most shy away from it.
However, you can use my sinking fund method to start saving for just about anything including debt repayment.
The sooner you are debt-free the sooner you can start living and forget money stress. So why not start with a plan and make your plan automatic.
In this post, you will learn the who, what, when, where, and why of sinking funds.
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What is a Good Sinking Fund Method?
Sinking funds, by definition, are a fund formed by periodically setting aside money for the gradual repayment of a debt or replacement of a wasting asset. (source Google dictionary)
In a nutshell, a sinking fund is a method of saving money that breaks your savings funds into categories. Therefore, you will pick the desired savings goal for a specific item or bill. For example, say you want to save for a down payment on a house. You can ask your bank to set up a separate account for savings purposes. Then make weekly or monthly contributions to this fund until you have reached your desired account.
Sinking Fund Example:
Save for Annual Car Insurance Bill of $900
$900/12 months = $75
You will need to contribute $75 to your “Car Insurance” fund. It will feel great to already have the money when the bill rolls around. You will cut the need for credit cards and avoid paying interest.
I find the best way to start your sinking fund is to have money automatically deducted on payday. If you make savings automatic, you will be more likely to keep up with your sinking fund method and will not forget or neglect to add money each payday. Plus when you make savings automatic, you forget you are even saving money because you don’t have to think about it.
You see, your brain is more privy to spending money. So making a second decision to transfer money to a separate account by yourself will take some will power. Yet, if you ask your bank to automatically deduct the money for you, you will not have to think about it.
Who should Use Sinking Funds?
Sinking funds are for everyone looking to save.
Even if savings seems daunting and you can’t seem to wrap your head around your budget, this is an easy way to get started. Try starting with something small, like $10-20 per paycheck. You will feel a sense of accomplishment when you see your sinking fund balance and this will give you extra motivation to save.
What if I don’t have $10-$20 to set aside? If you feel this amount is too high, take a look at your spending habits. Try writing down everything you spend for the next week in a spending journal. Are you buying fast food every week? Do you spend $4 on a cup of coffee every day? The point is you can find one thing to cut from your weekly spending and use that money to put aside in your sinking fund.
Sinking Fund Examples
- Debt Repayment
- Emergency fund (You can do this on top of your sinking fund)
- Car insurance
- Down payment for car/house
- Big-ticket item (tv, computer, iPhone)
- Monthly Grocery bill
When to Start Using Sinking Funds
Starting yesterday would be ideal, but there is no better time than today.
In order for this to work, you must take action. Now that you know what a sinking fund is, don’t be intimidated to talk with your bank.
Search around for a bank with a good interest rate or use an online bank.
CIT Bank is a great FDIC insured choice with a high-yield interest rate if you do not plan on taking money out often. Check out their options by clicking here.
Why Use Sinking Funds?
Sinking funds trick your brain into saving because you are not forced to make a second decision to put money away if you make it automatic with your bank. Also, you are less likely to tap into the funds and spend the money when it is set up for a specific goal.
So set some savings goals and calculate how much you will need to save each month to meet your yearly goals.
For example, if you know you usually spend around $1000 on Christmas each year, then set up your sinking fund and divide 1000/12 (months). You will need to set aside $83.33 each month to reach your savings goal. Just think about how easy Christmas will be this year with no money stress.
Is a Sinking Fund the Same as an Emergency Fund?
No, a sinking fund is not the same thing as an emergency fund. An emergency fund is an account set aside for the unexpected bill or emergency. However, with a sinking fund, you can set up a saving’s goal for a specific purchase or annual bill.
Yes, you need both. You can set up an emergency fund using the same concept as your sinking fund and have money automatically deposited on payday. I recommend six to nine months of your total expenses as an emergency fund.
Starting Your Sinking Fund Method
Why do you need to save? Are you thinking of going on a vacation next year? Does it seem like you have no money when Christmas time comes and you end up using credit cards? Think about your money struggle. Use these ideas to get your sinking fund started.
Then talk to your bank and ask them to set up your new sinking fund. In my opinion, the best sinking fund method is to have money automatically deposited in your sinking fund on payday.
Be realistic with your savings goals and do some quick calculations before you open your new sinking fund account.
Go do this now while you are reading this. One reason many people stay in debt is that they do not take action. Stop putting it off and just do it.
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Sinking Fund Conclusion
In conclusion, if you want to save more you must have a concrete plan. Use your own sinking fund method to set up funds for anything you want to save up for and find a sinking fund plan that works best for your budget. When Christmas rolls around and don’t need a credit card or your vacation is already paid for, you will thank yourself.
What type of sinking funds will you set up? Leave me a comment. I would love to hear from you.
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