Hey young professional! Let me introduce you to a financial term which saying out loud will make you feel like one of those plush-leather desk chair sitting, suit-wearing, cigar-smoking, spreadsheet-making, 4 figures a day-earning, corner office guys....or Mark Cuban instead.
~Sinking Fund~
If you've never known adult life (hereto defined as paying your own bills/post-college or vocational school) without DEBT, let me answer that nagging question you have. "Well how am I supposed stay out of debt when huge things come up like buying a car, Christmas gifts for my family, and once-in-a-lifetime international trips?" You may have heard people say you can do these things without credit, but just don't see how it works realistically. Here's where the term sinking fund comes in.
What is a sinking fund?
This is an amount of money you set aside in a savings account for a specific purchase coming up. Mother's Day always comes in May and Father's Day always comes in June, but did you know that Christmas is ALWAYS December 25th? Great news: you can plan for it! Bad news: this year, you have no excuse for putting Christmas gifts on your credit card without budgeting for it. Why? Because now that I've told you, you have the opportunity to start saving up for it.
Consider it your "monthly payment, interest-free".
What a sinking fund is NOT
As it turns out, a sinking fund is not for debt pay-off. You're probably saying "no duh", but some people like to save money for months and then throw it at a debt. IF your job is secure for the knowable future, just pay off the debt monthly as fast as you can.
A sinking fund is not an emergency fund. Is Christmas an emergency? Contrary to what your shopaholic aunt Betty might say, it most certainly is not. Why? Christmas and other big holidays (Hanukkah, Ramadan, Kwanzaa) are something you KNOW will happen. Emergencies are unexpected events that you most often can't afford to throw an entire paycheck at.
Thirdly, a sinking fund is not for retirement. That's what special investment accounts like Roth IRAs and 401ks are for. You definitely don't want to stake your non-working golden years on your "under the mattress" stash. You need heavy compounding interest on your side and a sinking fund account will not take care of that for you. Read down below for what kind of account you should use for a sinking fund.
"What kind of stuff should I have a sinking fund for?"
As we've established, Christmas gifts are a great place to start. The main ones I recommend are car maintenance, future car purchase, and travel funds. You may have heard that cars are a "depreciating" asset, which means their value goes down over time, even ignoring whether they are used or not. This is the best reason not to buy a car on credit. You've got interest working against you, PLUS the lessening value of your vehicle while you trudge away month after month giving a chunk of your paycheck to the lender. That's why you hear of uncle Joe being "upside-down" on his car--he owes more than the vehicle is even WORTH. In order to not lose money, you need to pay for that car with cash (whether you clue in the dealer or not). You can't help the depreciation, but you CAN prevent losing thousands on interest. Save up for that baby in a sinking fund. Consider it your "monthly payment, interest-free".
Next up--travel fund.
Holla at me, teachers!! You wait all school year to sip that frozen cocktail on a beach with your friends. By the time June rolls around, you are on a mad race to use up this 2 months of free time before teacher in-service is here and students are back in the school hallways once again. You deserve this break! But if you've been in the habit of swiping yourself into $2,000 of credit debt on a single summer trip, hear me out. You could have planned for this and come back home with NO new bills, NO guilt, and ALL the memories. Reality whiplash is REAL after a vacation! You KNOW you're going to want to hang at a pool or beach, visit family, have a few nice evenings out with friends during the summer, and maybe even hit a new workout program hard. Just $25-$100 a month (or more, for fun big trips you are aiming for) year round will make your summer vacay and travels care-free like they should be. My travel fund was the reason I was able to give a spontaneous "yes" this month to a South Padre beach trip at an Air BnB with family! Travel fund. Have one.
What else? Here's a list of annual expenses and other short-term savings goals:
Down payment for a house
Baby Fund- maternity medical bills, crib, baby swing, car seat, etc.
Property taxes- if you own a home, you can save money by paying this yearly instead of monthly, so build up the savings and pay it all at once!
Hobby gear- off-road bike, craft table, boat
New furniture Yes, you can wait a couple months for that replacement!
Home renovations-new kitchen backsplash, privacy fence, pool
Home repairs- I've separated this, because you may just decide to include this extra tidbit in your emergency fund
Kids' extra curricular activities- sports uniforms, bake sales, field trips, fees and dues
Pet fund- because sometimes, fur-babies need surgery too!
College savings- if you are at least a few years away from using the money, consider putting it into a 529, ESA, or custodial account as an investment
Okay, so now that we've determined WHAT to save for, let's talk about how much.
Decide how much to save each month
Consider when you'll need to spend the money and how important that thing is. Look at the following scenario:
Hannah has $1,000 in her emergency fund. Her Toyota is 10 years old and she keeps it well-maintained. Hannah makes $3,500 a month and doesn't intend to cash-flow the next 4-tire replacement out of a single paycheck. It's not an emergency because she knows her tire tread will likely be bad in a little less than a year-- let's say 8 months to be safe. Let's assume those 4 tires will cost $800 altogether. Hannah needs to save $100 a month in her "Car maintenance" fund. Look at that! She gets to have peace of mind for a large necessary purchase, WITHOUT devastating her $1,000 emergency fund.
For anything you know is coming up semi-annually or yearly, just determine ahead of time how much you realistically will need for that purchasing event (maybe add some padding for tax), and divide that amount by how much time you have left to save.
Here's why it's also wise to save based on how important an item is. If you have debt that you are paying toward every month, your pay-off date should be your main focus. Beyond your emergency fund, saving for fun things should not be on your list. Get your $1,000 mini emergency fund saved up, then tackle your debt like you're putting out a house fire--quick. Do not split your focus multiple ways for unnecessary purchases. AKA, stop drooling over that new TV, couch, or Cricut machine and pay your freaking debt off. You are throwing away $100s to $1,000s on interest each year. The only sinking funds I recommend to those paying off debt are for things that cover your basic "Four Walls": Shelter, Utilities, Transportation, and Food and those that are an absolute high priority. You may need to say "no" to a heavy-cost sport for your elementary school kid this year. You might say "no" to the family cruise this year. However, if a family member is terminally ill, yes you should save for travel costs to go to a funeral. You get the picture.
So which sinking funds fall into this "necessary" category?
Car Maintenance/Replacement Fund
Baby Fund
Property Taxes Fund- for homeowners
Home Repairs Fund- again, only if you own a home
If you're debt-free and have a full 3-6 month emergency fund built up, you can have fun with your sinking funds! If getting a new couch is on your "would be nice" wishlist, you may not go hard with $500 a month toward it. The urgency of a deadline is not there, so you might decide to just save $150 a month while you shop around.
"Ok, so where do I put my sinking funds?"
Put all of your sinking funds in a savings account that you won't touch. I recommend an account you can easily transfer to your checking to use a debit card for, but that may have a limited number of withdrawals per month. It's also good to find one with no minimum balance or regular fees. I use a Marcus high-yield online savings account, which these days is offering among the highest rates for non-CD savings accounts.
To keep track of separate sinking funds, extra savings accounts are fine but not necessary. Just find a way to show yourself how much will be in each fund in any given month. It's a fun motivator, for sure! Use your budgeting app, if there's a fund tracker.
Here is the savings chart I use to track my sinking funds and their growth. The third tab of this spreadsheet includes a month-by-month savings worksheet to see how big your sinking funds are going to grow. Below that tracker is a worksheet with formulas built in so you can quickly make calculations for how much to save each month toward your goals.
There it is, friend. The secret to staying out of debt long-term is sending monthly payments to the bank of YOU, interest-free.
Remember the following key points:
Find a separate savings account to park your money.
Decide as soon as you know of an upcoming purchase how much you'll save each month to be ready.
Keep track of your sinking funds carefully in your budget app or spreadsheet to make sure you don't rob your car fund to pay for Christmas gifts.
Have fun adulting!
If you are struggling to stay organized with debt pay-off or are still living paycheck to paycheck, there is truly better out there! I can help you get from in a rut, out of options, and out of control to making real ¢hange, stepping out of the box, and finally feeling in-charge of your finances. Reach out to me for a complimentary 30-minute discovery session so we can get to know each other! Do this by email at ash.musicology@yahoo.com or schedule on Calendly here. Here's to redeeming your dream!
Comments