Today I have an AWESOME guest post for you from Christine over at The Frugal Single. She’s going to explain what sinking funds are and why you need them. You can learn more about her at the end of the post.
Have you ever felt that sinking feeling when you find out you need to spend money on a home or car repair that you weren’t prepared for?
You knew it was coming; hindsight is always 20/20, and you end up beating yourself up for not planning it out sooner.
If you don’t have an emergency fund in place, that sinking feeling is all too familiar.
Financial experts say you need an emergency fund worth 3-8 months of living expenses (to cover you during a layoff or career change).
Other experts say having at least $1000 on hand for real emergencies is the minimum you should have on hand for life’s surprises.
There is a way to prevent that sinking feeling next time you get hit with life’s unexpected/expected expense events (say that 5 times fast).
It’s Called a Sinking Fund
Aptly named, a sinking fund is an investment term that’s a fund to which money is added on a regular basis and used to ensure investor confidence that promised payments will be made.
But everyday savers like you and me can use sinking funds to buffer our lives from surprising (or not so surprising) expenses.
A simpler definition of a sinking fund is where “money is set aside in a special account to which regular contributions are made by way of additional money with plans that by a specific date, the fund will be sufficient for a particular purpose.”
While you work on paying down your debt, put money into your sinking funds and create a safety net to cover unexpected BUT expected expenses.
Sound like an emergency fund? It’s really not.
An emergency fund is money for the “unknown” and for general purposes.
A sinking fund is money for the “known” and specific purposes. You just don’t know when you’ll need the money.
You should start today by stashing away $10 to $20 a paycheck into these sinking funds.
Here are 8 areas you where you’ll want to protect your budget:
1. A Vehicle Fund
Your vehicle needs a savings account of its own.
If you have a vehicle then you can expect to someday pay license and registration fees, minor and major repairs, cleaning bills (especially if you have children or pets), replacement parts such as tires and windshield wipers, or parking and speeding tickets (hey, we’ve all done it).
You can plan and save for license and registration fees but you can’t plan for repairs, cleaning, or the occasional speed trap.
Why not have money put aside for these inevitable possibilities.
2. A Pet Fund
Your pet will inevitably get sick, need a yearly physical exam, shots, or a new toy to replace the one he or she destroyed (watch your shoes!).
You may be able to plan funds for a yearly physical exam and shots, but you can’t plan for when you pet gets sick or injured.
Unless you put your pet in a bubble 24/7, you’ll need money to keep them healthy.
3. Home or Apartment Fund
Everyone will experience the need for repairs with a home or apartment.
Whether it be to fix a personal item within your rented apartment or a replacement screen for your patio door (which your child or pet tore through during a play date).
Imagine this…it’s been a year since you started your home sinking fund and didn’t touch it all that time. Now you need to replace a door or faucet fixture.
You may not have a budget for it just yet because you’re paying down debt, but you won’t need to reach for your credit card to pay for the repair.
You’d have money in your sinking fund just for this purpose.
4. A Computer Fund
No one thinks about this one.
I never did until my computer took a poop on me during finals week!
If you’re not tech-savvy, it’s inevitable that you’ll need to pay someone to help fix your computer.
If you have a friend that will do it for you, great! It’s still a good idea to pay a friend some money for helping out.
If you start a computer fund, you’ll have money set aside just for the purpose of computer maintenance or replacement.
5. A Gifting Fund
Even if you’re normally a hermit, someday you’ll need to give a gift to someone.
A family member, a neighbor, a graduate, a newly wedded couple, or a retiree.
Unless you keep track of all the gifts you may ever give during the year, I suggest this fund because there will always be gifts to give.
You can pre-plan birthdays and anniversaries but people’s budgets usually get side tracked with invitations to baby showers, graduations, retirements, a birthday for a child’s friend at school, or for just-because.
Having money for this cause will keep you from reaching for the credit card to cover purchases.
6. Children’s Fund
If you have children, this one should be at the top of your list.
This sinking fund is different from the savings you have for a college fund.
This fund is for the unexpected/expected expenses that come with having children.
As sure as the sun will rise tomorrow, your child will have a school project, a field trip, a friend’s birthday party, or a potluck for their extracurricular activity like soccer or baseball.
Having money set aside for these things will help your budget in the long run.
7. Medical Fund
If you don’t have a Health Savings Account (a tax-advantaged medical savings available to taxpayers enrolled in a high-deductible health plan). Then you need to set aside money specifically for medical expenses.
The cost of health is rising due to the rising costs of health insurance.
You’ll eventually get sick and as you get older, depending on your health, you may face a large medical expense in the future.
Start a sinking fund for medical expenses today. If you don’t use it, great!
Keep rolling it over and never take money out from it unless it’s for a medical reason.
8. Travel Fund
This fund is not for that family trip to Europe or Disneyland.
This fund is for that trip everyone dreads of taking.
If you live far from home, you need to have money set aside to be able to travel back home for an emergency.
This money is used for a short-notice trip to help a loved one.
If you have aging parents or siblings, a close friend who is sick, or an adult child who needs your help often, then you need to be saving money for the “when” they need you, not “if”.
Be prepared for this one so you won’t have to use your credit card to take an emergency trip.
Sinking funds will protect your hard-worked budget when life’s unexpected/expected expense events happen.
Here’s how you can stash your sinking fund.
Some people set up automatic savings to funnel all the money into one account, and keep track of the amounts for each fund in an Excel sheet or notebook.
Others open separate accounts for each fund and set up automatic savings to funnel money into those specific accounts.
Online banks like Ally and Capitol One (formally CaptialOne 360) make setting up automatic individual savings and checking accounts easy.
You can also stash your sinking fund into a goal-oriented, fee-free micro savings account like Smarty Pig or Simple.
Start a sinking fund today! It’s easy and can be started with just $10 or $20 a paycheck.
Have you started a sinking fund?
What unexpected/expected life events are you saving money for?
What sinking funds would you suggest?
About the Author:
Christine Caldera is the owner of thefrugalsingle.com and a freelance writer/editor specializing in blog posts, research, and site content. Contact: email@example.com or say hello on Twitter @thefrugalsingle.