Are you struggling to save money?
Do you spend your money as soon as your paycheck hits your checking account?
Do you blow your budget with an impulse purchase?
Consider setting up a sinking fund to protect your budget against poor decisions. Take your budget to the next level by organizing your money across multiple bank accounts – each with its own purpose. Most banks will offer you the option to open multiple accounts without additional fees. And if they do charge fees, consider switching – SmartyPig is one of my favorites
Additionally, fund each of sinking fund with an automated withdrawal from your checking account to your savings account on the day your paycheck is deposited. Because what’s out of sight is out of mind.
Here are 7 Sinking Funds to Safeguard Your Budget
1. Emergency Fund
Emergencies are an unfortunate reality of life. In order to protect yourself from a future financial setback, you’ll want to set up an account to cover a minimum of 3 to 6 months of income. Dip into your emergency fund only if you have a true unexpected emergency.Â
2. Repairs and Maintenance Fund
Cars and appliances are big purchases. They also break down and require regular maintenance. As such, you want to safeguard your emergency fund. You can do this by setting up a separate account dedicated to cover these costs. Â
3. Christmas & Gift Giving
Christmas happens every year. And every year, Americans turn to their credit cards to pay for gifts. Be smart; start saving in advance. Similarly, make it easy to fund by setting it and forgetting it. Create a budget in advance and schedule an automatic withdrawal each month for 1/12th of your budget. When Christmas rolls around, you’ll be prepared to celebrate with intentional gifts for your friends and family.
4. Vacations
Aruba, Jamaica, Disney, Italy – wherever you want to spend your holiday time, it will likely cost in the thousands. The worst thing you can do is pay for your vacation for years afterward. Get ahead of your vacation and start funding a vacation account specifically for your future relaxation.
5. Annual Payments (Insurance, Annual Dues)
Instead of writing a large check for your car or home insurance, consider splitting it up into mini payments which you fund by automatic transfer to a savings account specifically for your insurance. Once your bill comes due, you’ve already got the money saved up. This is also a great account to build up enough savings to prepay your utilities for a year. Â
6. Impulse Tax Fund
This is my favorite sinking fund. Any time you opt out of frivolous spending or forgo an extravagance you would normally buy on impulse, transfer the cost of that purchase to this account. As the money accumulates, you can choose to buy something extravagant, or transfer it to one of your other accounts.
7. Large Purchase Account
Are you buying your first home and want to save for a down payment? Are you looking to purchase a car with cash, or perhaps something else just as big? This account is a long-term savings account. Any time you receive a large sum of money, such as an annual bonus, or a tax refund, deposit it in this account. Over time, you’ll see it grow.
Setting up these seven sinking funds and funding them through automatic withdrawal will be your best hedge against future financial hardships and help you reach your savings goals faster.Â
Do you use a sinking fund in your budget? Leave a comment and let me know.
Kate Fox is a former CPA, with twenty years of experience in public accounting and corporate finance. Born and raised in Alaska, Kate is currently based out of southeastern North Carolina. She loves coaching others on personal finance and spends her free time traveling with her family or relaxing by the pool with a good book, probably about money.