What the Heck is a Sinking Fund?
Do you ever wish you had that little pot of gold at the end of the rainbow? Of course you do. If they’re being honest, everyone does, myself included! But take a moment to close your eyes and imagine what it would be like if you could actually find that pot of gold. Now, open your eyes. Are you smiling? You should be, because today you will read about how you can create your own pot, or even pots, of gold.
Before you begin thinking, “This sounds either crazy, or too good to be true,” keep reading. The idea is that you are opening one or more accounts for a specific future purpose or replacement of a depreciated asset.
These are called SINKING FUNDS, and most online banks will allow you to set up such accounts with no minimum balance to maintain, no hidden fees, and they pay you interest at a lot higher rate than at most banks with physical branches in local communities.
Note: Don’t worry too much about the interest rates. They are higher for online banks vs traditional banks, but let’s be honest with ourselves here: we are talking about a whopping 0.50% better interest rate. This means for every $1,000 you have in savings, you earn an extra $5 every year. Yippee…
Sinking funds can help you save money simply by paying your bill from the funds you’ve accumulated in them while avoiding the high interest charges you would get from paying with a credit card. Basically, think of your sinking fund as a replacement for your credit card.
Proactive vs Reactive
Sinking Funds are Proactive
The number one habit of highly successful people is that they are proactive. They don’t wait for life to happen to them, instead they happen to life.
When you plan ahead and open a sinking fund for a future expense, you’re being proactive, and you are being awesome with your money!
Credit Cards are Reactive
If being proactive is a habit of the highly successful, then the opposite must also be true. Credit cards (when not used properly) are reactive. Any time you have an unexpeted expense and you don’t have the money, you end up going into debt using your credit card. No bueno.
What Sinking Funds Should You Start With?
1. Vacation Fund
If you long for a trip to paradise but don’t think you’ll ever be able to afford it, a sinking fund could be the way you can finally fulfill that dream. Once you are able to meet your monthly financial needs, you can start putting a little “extra” money aside at the end of each month.
Another option is to fund your vacation sinking fund throughout the month whenever you notice a surplus in your bank account. The idea is that putting it into your sinking fund right away will prevent you from spending it on some other type of splurge in the meantime.
2. New Car or Car Repair Fund
Often people don’t think about saving for a new vehicle until their current one is beginning to show some age or wear and tear. However, at that point it is nearly too late. The time to begin saving for a new car is immediately after buying one. A new car sinking fund may also be able to prevent you having to pay a sucky car payment each month for years to come.
The average monthly car payment is $482. If you made this payment into your sinking fund for 20 months, you would have almost $10k to buy another car. This is why proactive people have sinking funds 🙂
Saving for repairs on your car, new or old, is also a good idea that could prevent you from having to go into debt debt in order to fix your main mode of transportation.
3. Christmas/Birthdays & Gifts Fund
This is one account you may have thought of right away when we first mentioned sinking funds because so many people have seen ideas on Pinterest and other social media channels that suggest you save a certain amount each week to end up with a tidy sum by Christmas for gifts.
But instead of socking cash away in a drawer or a jar, why not let it build interest and add up more quickly in your sinking fund savings account? Plus you’ll be less tempted to dig in there and “borrow” some to pay for something other than what your sinking fund is meant for.
4. Home Repair/New Appliance Fund
Even if you don’t take vacations, don’t have a car, and don’t celebrate holidays with many gifts, you might still need this sinking fund. Just about everyone has been hit with unexpected repair bills from a refrigerator that suddenly stops working, or a washing machine that quits. So you call a repair person and get it fixed, or purchase a new one.
But, where does that fit into your monthly budget? The answer is “nowhere” unless you’ve been saving for it in a sinking fund. Even those who rent instead of owning a home will likely have to shell out for new things around their home once in awhile, so a sinking fund for household repairs and upgrades is still a good idea for renters.
5. Medical Co-pay Fund
Unless you have been asleep for the past few years, you are surely aware of the rising costs of medical care. Not only are medical facilities and pharmacies charging more than ever before, but insurance premiums are going up as well. A sinking fund could be a way to save for the co-pay and/or deductible from an unexpected medical bill you might experience.
You never know when you’ll have to have an emergency surgery or end up going into the critical care clinic when you get sick on the weekend. Having money saved in a sinking fund will at least allow you some peace of mind so you can focus on your health instead of how to pay for these unexpected expenses.
Related Post: What is a Health Savings Accounts (HSA)?
Podcast Episode 005: Save the Most Money with Sinking Funds
We are all Different…
Chances are you are unique and awesome in your own special way, so why not set up a sinking fund for what makes you different? Here is a list of unique sinking funds that may fit into your life as well. And, don’t you be judging just yet..these are ones Chris Peach has actually seen!
- Travel Home Fund
- Party Fund
- Weightlifting Supplement Fund
- Diet/Weightloss Fund
- New Boobs Fund
- Beer Brewing Fund
- New Pool Fund
- Vegas Fund
- Boob Reduction Fund
- Concert Fund
- (Online) Dating Fund
- Your ______ Fund 🙂
Theses are just some ideas for different things you could open sinking funds, however the 5 listed above are a great place to start.
I’m sure you have other ideas going through your mind right now as well. But regardless of the reason or name of your fund, you should start a sinking fund or two today and create your own little pot of gold. You’ll be glad you did!
Sprinkle This on Social Media
Normal is living paycheck-to-paycheck, with a 0% savings rate, and wondering what the heck happened to the money! Sinking Funds are the only way I would ever recommend saving for those things that always pop up in our lives. Click any of the buttons above to sprinkle this savings plan out to the world!