It’s hard getting out of debt. Don’t let anyone tell you that it will be easy!
Once you are on the road to financial recovery you will want stay there. You won’t want the newfound feeling of financial peace to go away. One way to avoid going back into debt is to anticipate and plan for your purchases throughout the year. Enter…sinking funds.
What Exactly is a Sinking Fund?
A sinking fund is a short-term fund that can be used to save gradually for an anticipated purchase or expense. The balance will sink or decrease as you use the money for your purchase. Sinking funds will also help you avoid sinking your monthly budget. I have to frequently remind myself of this because I have a tendency to feel bad about depleting my sinking funds. But that is exactly the point! The money should be used for your anticipated purchase in order to avoid disrupting your monthly cash flow plan (budget), reaching into your emergency fund, or swiping the credit card.
Start a Life Happens Fund
Author Michelle Singletary recommends that we create a Life Happens Fund, which is a type of sinking fund. After you do the hard work of establishing your emergency fund, the last thing you want is to do is deplete it because of an expensive car repair or a new set of tires. If you use the emergency fund for tires what happens if a more pressing emergency arises while you are trying to build the emergency fund back up?
This is when the temptation to reach for credit cards can become overwhelming. Starting a Life Happens Fund can help protect your emergency fund and keep it reserved for real, true emergencies. Speeding ticket? Use the Life Happens Fund. Involved in a fender bender and need to pay your deductible..use the Life Happens Fund.
Which Sinking Funds Do You Need?
As your cash flow improves you may choose to develop several sinking funds. The categories you select can vary. For example, I started a Baby Sinking Fund when I found out that I was expecting my last child. I set aside a specific amount of money every paycheck and then worked a few extra shifts in order to save a couple thousand dollars before the baby was born. My son is now 8 months old and the sinking fund has been used to by diapers, formula, and other items that he needed. I have not had to change my monthly budget at all!
Commonly Used Sinking Funds
- Christmas
- Birthdays/Gifts
- Home Maintenance
- Car Maintenance
- Kid’s Summer Camp
- Clothing
- Vacation and Travel
How Do You Establish a Sinking Fund?
You can take advantage of windfall money or unexpected money such as a work bonus or income tax refund to fill your sinking funds. Instead of waiting until Christmas rolls around and pulling out a credit card or wrecking your budget, why not start saving now? You can begin your Christmas fund by setting aside a couple of hundred dollars from your income tax refund. Another strategy is to save incrementally throughout the year by saving a specific dollar amount from each paycheck. Keep in mind it will take time to get these sinking funds funded. Pick one or two to begin with and see how the concept works for you.
Where Should You Keep the Money?
An online savings account works great! You could also opt to keep the money in a cash envelope, particularly if it is a small amount of money or you plan to use it in the near future.
“If you aim at nothing, you will hit it every time”. –Zig Ziglar
What big purchases are you anticipating over the next year? Do you have a plan for how you will cover the costs?