Hopefully the holiday season didn’t leave too much damage when it comes to your finances (Yeah, right). Giving is good; many consider it better than receiving. While generally true, sometimes the reality of all that giving brings January blues if you find that you were a bit more charitable than your bank account would have liked. Now is a great time to reassess your finances and develop a plan to tackle times like this with confidence and cash.
One way to cover expenses that you know will come up each year is with sinking funds. The name is given to money you put in dedicated accounts that you automatically contribute to each month, with the expectation that when the expense comes due, you already have it covered. Brilliant, huh?
Sinking funds are a wonderful savings strategy to use because you always have the cash you need for a specific expense. For example, when it’s time to buy new clothes, you don’t have to cringe since the money is already available. Similarly, when its time to give gifts, just withdraw what’s needed from the Gift Fund and voila! No stress. No worries.
One added benefit comes with car insurance payments. There is usually a $100 -$200 discount for paying the 6-month premium in cash. If you have saved up the payment in a sinking fund, then not only will you eliminate a monthly bill, you’ll also save a couple hundred dollars in the process. Granted you’ll have to find the first premium payment from a bonus or tax refund check, but after that, just save what would’ve been your payment in the Car Insurance Fund, and you’ve just increased your buying power by, on average, $400 for the year. Nice!
Below is a sample of possible sinking fund accounts:
- Car Insurance
- Personal Care/Self-Care
- Car Expenses
- Summer Camp
- Kids – Field Trips/Yearbooks/Incidentals
You may be asking, “Do I need to create a separate account for each one?” The short answer is “YES!” Why? Because by having a separate account for each fund, you will never have to micromanage every penny withdrawn and determine how it was used. Once the fund is empty (which it shouldn’t be since you contribute to it monthly), then just stop spending from it until its replenished. Piece of cake!
There are many ways to create the number of accounts that works best for you. Online banks allow you to open multiple savings accounts that you can make automatic deposits into every time you get paid. So, there it is! No need to put yourself in hiding when recurring expenses come due. Gift yourself the freedom having sinking funds brings by opening a few today. You’ll wonder how you ever lived without them.
Share what sinking fund accounts you’ll create in the comments. If you already use them, share your testimony about the freedom they bring. We can all use a little motivation right now.
Happy Saving! Live Well!