Sink or Swim: How Sinking Funds Can Keep You Afloat Financially

We're already in the deep end... 🏊

February 27, 2023

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5 min

We've all been there: looking at our accounts when our bills are due and mentally kicking ourselves. If we hadn't bought that one thing that we really wanted but didn't really need, we wouldn't be scraping by this bill season.

But let's make our shared pastime just that—a thing of the past. If you haven't already, you should split your paycheck into 4-5 accounts that will take care of your financial responsibilities.

One of those accounts and one of the smartest ways to manage your finances is by setting up a sinking fund. This type of account allows you to save for future expenses that you know are coming but may not have the funds to cover them when the time comes. In this blog post, we will discuss sinking funds, how they work, and how you can use them to your advantage.

What are Sinking Funds?

Sinking funds are a type of savings account that you set up for a specific financial goal or expense. These funds differ from your emergency fund, which is set up for unexpected expenses. Sinking funds are set up for expenses you know are coming but may not have the funds to pay for them when the time comes. Examples of expenses you can use sinking funds for include car repairs, vacations, home repairs, or even Christmas gifts.

How to Use Sinking Funds

The first step to using sinking funds is to identify your financial goals or expenses you know are coming up. Once you have identified your goals, you need to determine how much money you will need to save each month to reach your goal by the desired date. For example, if you want to save $1,200 for a vacation next year, you will need to save $100 a month for 12 months.

Next, you need to set up a sinking fund account. You can create a separate savings account or use an existing one. The key is to have a separate account to not confuse your sinking fund with your emergency fund or other savings goals.

Finally, you need to automate your savings. Set up an automatic transfer from your checking account to your sinking fund account. This way, you will not forget to make your monthly contributions, and your savings will be consistent.

Benefits of Sinking Funds

One of the biggest benefits of sinking funds is that they help you avoid going into debt. By saving up for a specific expense, you will have the funds you need when the time comes, and you will not have to rely on credit cards or loans to cover the expense.

Sinking funds also help you stay focused on your financial goals and avoid overspending. When you have a sinking fund, you are less likely to spend money on things that are not important to you.

Conclusion

Sinking funds are a powerful tool that can help you reach your financial goals and avoid debt. By setting up a sinking fund, you can save for future expenses that you know are coming up, and you can avoid the stress of not having enough money when you need it.

Remember, the key to using sinking funds is to identify your goals, set up a separate account, and automate your savings. With a little discipline and consistency, you can use sinking funds to take control of your finances and achieve your financial goals.

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