Budgeting tips: What are sinking funds??

Budgeting. The dirty word that nobody wants to talk about, but EVERYBODY wants to excel at innately or learn through some sort of magical osmosis. But then month after month and then year after year we spend our hard earned money and have no clue where it goes. ORRRR we work really hard on our budget, and rock it’s socks off for a month until a holiday or birthday or field trip or soccer uniform pops up and throws a wrench into our perfectly laid plans. AND THEN we deviate from the budget a little…and then a lot…and then we throw the budget out the window and go back to our old ways because it JUST DOES NOT WORK FOR ME…err…us. (I MAYYY have a little experience with this one.) I know this is going to sound crazy, but the solution is…wait for it…PLAN AHEAD. I know it sounds simple, and it can be. Sinking funds are the simplest way to make sure that you have enough money for ALL the things you want, need, and even those surprise attacks that come out of left field.

What are sinking funds??

Sinking funds are VERY specific funds set aside for a VERY specific purpose.

For example you might have a sinking fund for Christmas. If you start the fund in January and want to have $500 saved for the next Christmas, you would want to budget in $50 per month to deposit into your sinking fund so that you have those funds available in November and December to use for your Christmas shopping. Instead of trying to budget $500 into your December budget, you are only budgeting $50 per month…SOOOO much easier than trying to come up with the entire $500 when it is time to start buying gifts.

What types of sinking funds should I have??

Everybody has different expenses, but just think of ALL of the times in the year when it seems like you are HEMORRHAGING money. I have sinking funds for Christmas, Easter, birthdays, back to school, and vacations right now, but after this year I am planning to re-evaluate and determine what else I need to be saving up for. For example, this Spring I decided I may need to add one for graduation or for gifts in general. I got 8 graduation announcements this year at the same time as we received 7 wedding announcements, and that was NOT in my budget, so next year I want to be more prepared. There is NO limit to what you can have a sinking fund for…Disneyland, new boots, a puppy, Valentine’s Day, date night, a wedding cake, furniture, a car, Halloween, Spring Break…whatever you want to save up for. That is the beauty of having a budget…you can ACTUALLY buy the things you want!!

But why??

We live in a world where we want EVERYTHING right now. And in a time where credit is king, we can LITERALLY spend money we don’t have on stuff we don’t need. BUT as most of us know…debt is NOT FUN!! If you ARE in debt, sinking funds can help you stop the cycle. If you are NOT in debt, sinking funds can help save you from getting into debt in the first place.

For example: Say I want a new mattress and it will cost $1000 and I only have $400 available to spend. Instead of paying with a credit card and accruing all sorts of interest, I can plan ahead and start a sinking fund. I would start with my $400. Then determine how much I can spare each month for my mattress fund. If I can spare $300 per month, I will have enough money in 2 short months. If I can spare only $150 per month, it will take me 4 months.

The fun part is challenging yourself to fill your sinking fund early. Let’s say you start with $400. You can spare only $100 per month for your sinking fund and are planning on purchasing your new mattress in 6 months time. But after month 2, you have a yard sale and make an extra $300. Instead of blowing that money, sink it into your mattress fund. You now have $900. Then you challenge yourself to cook at home for the month instead of eating out and you save $50…sink that money!! After just 3 months, you will have more than enough money for your mattress and will have ZERO debt and ZERO interest and ZERO guilt!!

Now imagine you charge that mattress on a credit card and pay only the minimum payments for 2 years. You will end up paying almost double in some cases for your mattress and you will have ANOTHER bill to pay on each month. Instead of the $100 dollars a month going into your sinking fund, it will be going towards the interest you now owe on the mattress, and you will have the stress of being in debt and feeling held back by your money. If you take control of your spending, you will have MORE money to spend on the things you REALLY want…true fact!!

Where do I keep the money??

There are a few options for where to keep your sinking funds and you will REALLY have to know what will work best for you. I am currently using a cash envelope system, so for me, a cash works best. I have tried just leaving the money in my checking or savings account, but when all of my money is just hanging out together, it is harder for me to know what it is all for. And when it is all there looking at me in my account, I am more tempted to spend it. SO what I do, is put that money into a specific envelope earmarked for that sinking fund. So I have a CHRISTMAS envelope and each month when I pull out my cash, I deposit my budgeted Christmas money into the correct envelope. I do not usually carry those envelopes with me unless I am planning to shop specifically for gifts, ANDDDD since I buy A LOT of my Christmas gifts from Amazon, I can deposit my sinking funds in November and have that money available for my online purchases as well.

This is TOTALLY doable using bank accounts also. Many banks allow you to have as many small accounts as you want and to name them specifically. You could have 5 small accounts and each month deposit your budgeted money directly into your individual sinking fund. For example, if you have 4 sinking funds for Halloween costumes, Christmas, school clothes, and vacation. Then when you receive your paycheck, you would take that $175 from your budget and deposit $20 into Halloween, $100 for Christmas, $25 for school clothes, and $30 for your vacation fund. You can also determine how many months you want to save. If you only need $200 for school supplies and clothes, maybe only save $50 per month from March until June. Then you can allocate that $50 for something else during the other 8 months of the year. Once you start planning where your money is actually going, you will find ALL sorts of ways to use those $50!!

How do I determine how much money I need to save??

Start by tracking your spending. I have an EASY printable spending tracker I created that will help you determine WHERE your money is going. If you have not tracked your spending…your mind will be blown. Seriously…start there. Go read THAT post and laugh at me for how much money I spend on cat food…it is ridiculous!! Tracking will be a good place to start.

Research it. If you are saving for a trip to Hawaii, look up flights, rooms, food, etc and estimate how much money you will need to save for that trip. This is also a good way to rein in your spending. If you have saved $200 for back to school and show up to the store with $200 in cash, you will be WAYYYY less likely to go over your budget. You have planned that spending for 4 months…you will NOT be wasting that hard earned and well planned out cash on crap you don’t need!!! A budget is simply a way to make a PLAN for your money. The tricky part comes when it is time to STICK to that plan. But trust me, if you go to the work to save and prepare and organize, sticking to your budget will be MUCH easier than if you just wing it and hope for the best. Because those who are hoping for the best…will probably be overspending and winging it OFTEN leads to charging it.

How is this different than a savings account??

Sinking funds are not INSTEAD of a savings account. Sinking funds are IN ADDITION TO your regular savings. You should be funding your savings account FOR SURE. But if we use the above example of the $175 budgeted for savings and just throw it into the pot, we have no idea what that money is for. Let’s say we deposit that extra $175 into savings for 6 months and then we notice we have a fun $1,000 cushion in our account just WAITING to be spent. Without planning ahead for those events we KNOW will be coming up, we may be tempted to use that money for WANTS. OR if we leave that money in our checking account, we may nickel and dime that money away on gas station snacks, and magazines, and pretty new shoes (not speaking from personal experience here I promise…wink wink). Sinking funds are a way to plan ahead, set that money aside, and then use it in a responsible way. The more organized we can be with our money, the more MONEY we will have to organize!!

My suggestion, start off small with ONE sinking fund. Choose something that is a few months away and start saving for it. Then when you show up, cash in hand, you will feel SOOOO empowered. There is just something about paying for something IN FULL with cash that feels so good. You can find my sinking funds envelopes HERE…there is just something about CUTE envelopes that make saving easier!! Good luck with your sinking funds. NEXT up, we will talk about how to fund your sinking funds when you have not planned ahead. Leave your budgeting questions in the comments and I will try to get them all answered in future posts. Let’s chat soon. Jess

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