Introduction
Establishing a sinking fund means setting money aside now knowing you’ll need it later. You should be able to avoid most financial emergencies and reserve your emergency fund for something like illness or job loss. An emergency fund is designated for something that hits you suddenly, something unexpected, while a sinking fund is intended for planned expenses, something anticipated.
How to Set Up a Sinking Fund
Designate an account to contain your sinking fund. It can be a regular savings account, something simple, just a means to separate the money. Naming it can help keep you motivated and discourage frequent use for other purposes. Give it a label like “New Beth Kitchen” or “Bermuda or Bust!”
Note: If you lack enough discipline, keep reminding yourself how happy you’ll be when you reach your saving goal. Imagine owning or doing anything you’re saving for when you’re tempted to repeatedly use the money for other purposes.
Now place a reasonable price tag on the expense. It may be tempting to be light, but then you might reach the finish line only to realize you haven’t saved enough. If you go too far, you might face difficulties and feel discouraged before reaching your goal. So look into that kitchen or your Bermuda getaway and set a realistic target.
Let’s say your number is $6,000. Look at your budget. How much can you save monthly? Something in the range of $500 will have you cooking in style in your new kitchen within a year. That may seem like a long time, but consider it this way: you won’t be going into debt to cover renovation costs, allowing you to enjoy all that food better without feeling the additional gut-wrenching pain.
In some cases, you may already have a target date. Maybe your Bermuda trip is coming up because your sister is having a destination wedding in 10 months. You’ll need to increase that figure from $500 to $600 to reach the goal, but you can still avoid putting a lot on your credit cards even if you can’t manage it well. Saving $200 a month means you won’t have to charge as much.
Sinking Funds Can Be Proactive
At some point, you may need to adjust the exhaust system on your old car or call a plumber to desperately unclog a drain. Setting some money aside each month now will make stressful events easier to handle. You’re prepared.
Many people set aside an amount each month to cover these expenses without realizing they are essentially sinking funds. And if you know you have a big repair coming up, you can pinpoint how much you’ll need to save in advance.
Saving Money for Fun Things
Yes, we’re back to Bermuda again. Set aside money to cover the cost if there’s a dream vacation you want to take or even if you just want to go to the beach this summer. Nothing ruins a holiday or day off faster than knowing you really can’t afford to be there. Your vacation shouldn’t ruin your budget, and saving in advance is the best way to avoid that.
Note: Keep in mind that it may take you a few years to save money if you’re on a tight budget, especially if you have big plans.
Covering Healthcare Expenses
You may already have a sinking fund of sorts with a Health Savings Account if you have a high-deductible health insurance plan. You should be able to handle the rest of your healthcare expenses without major issues if you can save enough to cover the annual deductible.
Note:
You should also consider any money your employer will contribute to help cover your costs.
Estimate the amount you will need to increase in this type of sinking fund when you get married and have children. The amount should increase with the rising risks.
Planning for Major Purchases
Pay for major purchases in cash. You may start a sinking fund for the next car you want to buy or save a sum for a down payment on a house. Creating a sinking fund will help you avoid debt and make the purchasing process easier so that you can buy something you can truly afford. The more cash you have to pay, the less borrowing you will need.
Conclusion
Setting up your sinking funds now will make it easier for you to achieve other savings goals and reduce financial stress. Track the money in a separate category in your budget. Treat it as a commitment and stay motivated while watching the balance grow.
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Source: https://www.thebalancemoney.com/what-categories-or-events-should-i-have-sinking-funds-for-2385678
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