The "Sinking" Secret That Will Save You Major Moolah
When I graduated from college and got my first full-time salaried job, I panicked. Money terrified me, especially when it came to learning how to manage it for myself. A few weeks after I walked across the stage, I stayed up all night watching videos and reading articles by The Financial Diet. In my thirst and quest for financial knowledge, I came across a God-sent saving method: sinking funds.
There is no better time than now to start investing in yourself now, and a great place to start is with these nifty and intentional little savings accounts. If you’re just starting out, it’s never too late. Here’s how to start saving smarter and avoid debt with sinking funds. Taking good care of your money is caring for yourself!
What are sinking funds?
In the simplest terms, sinking funds are essentially savings accounts devoted to specific expenses. They can be for recurring spending or sporadic spending, for a specific purchase or an aspirational one. Although they don’t take the place of a full-on emergency fund, I sometimes like to think of them as baby emergency funds that are less intimidating. They’ve saved me from the stress of unexpected expenses without dipping into my big emergency fund on so many occasions!
What can I save for?
The biggest misconception about sinking funds, though, is that they must be devoted to dire needs rather than wants. Sinking funds can be used for anything and everything you want to save up for, and in fact, it’s smart to start them for things you may not necessarily “need” right now but want down the line! Some ideas for sinking funds, and a few that I’ve created personally, have been for:
travel (or a specific upcoming vacation or trip; go, you!)
medical expenses and copays
birthday, holiday, or general gifts
car repairs (or a new car!)
weddings (especially if you’re in the wedding party — travel, gifts, and a dress add up!)
down payments and deposits (for a house, car, apartment, etc.)
How do you start sinking funds?
Thanks to the 21st century, you can do this quite a few ways. If you prefer cash, you can put away the money in an envelope and tuck it away in a safe place. You can call up your bank’s customer service phone line and ask them to open a few additional savings accounts under your pre-existing checking account (typically at no cost or minimum), or you can do it yourself through your bank’s app. I give each savings account a specific name rather than keeping the default names like “Savings Account 1” and “Savings Account 2.” Hello “Wedding Fund” and “Shopping Fund”!
Where else can I put sinking funds?
If you don’t plan on dipping into these sinking funds often, you might even want to consider opening a High-Yield Savings Account (HYSA) — a type of savings account that grants you around 20 to 25 times the national average of a standard savings account. I have a Synchrony Bank HYSA and highly recommend it! There’s no minimum account balance requirement, no transfer fees, and you earn interest money by just allowing your money to sit in your account. How cool is that?
How much should you put in your sinking funds?
There’s no right answer to this; you can put in as much or as little into your sinking funds as you’d like. It’s smart to take a few things into consideration, like how much income you earn, what your current (or upcoming) needs are, and when you need the money. If you start a sinking fund for holiday gifts in January, you may only need to put in $5 dollars every week or $15 every other week, for example. If you have a trip or a bachelorette party coming up in two months, you may want to start putting in $25 a week. It’s all up to you and your circumstances: you’re in control!
How often should I put money into my sinking funds?
As often as you’d like! I set up an automatic transfer for each of my four sinking funds once a month since I’m a freelance writer that gets paid at the beginning of each month. If you get paid bi-weekly, you might consider contributing each payday. Again, there are no right answers and you can change how much you put into your sinking funds at any time. Don’t be afraid to play around with how much you invest in your sinking funds, how often you invest in your sinking funds, and what type of sinking funds you create. The good news is: it’s all yours at the end of the day.
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.