{"id":2567,"date":"2022-03-28T16:38:47","date_gmt":"2022-03-28T20:38:47","guid":{"rendered":"https:\/\/www.skypointfcu.com\/wph\/workarea\/?p=2567"},"modified":"2022-04-11T09:36:24","modified_gmt":"2022-04-11T13:36:24","slug":"get-on-top-of-planned-expenses-with-sinking-funds","status":"publish","type":"post","link":"https:\/\/www.skypointfcu.com\/wph\/workarea\/blog\/get-on-top-of-planned-expenses-with-sinking-funds\/","title":{"rendered":"Get on Top of Planned Expenses With Sinking Funds"},"content":{"rendered":"\n

In a given year, you likely have expenses that you know are coming \u2014 holiday gifts, the family vacation you take every summer, annual homeowners association fees or maybe membership renewals. But just because these costs are predictable doesn\u2019t mean you\u2019re always prepared.<\/p>\n\n\n\n

If you are pulling from your emergency fund or using a credit card to cover predictable costs, you might consider using one or more \u201csinking funds.\u201d A sinking fund is a savings account dedicated to a particular expense that you fund gradually through regular payments. Sinking funds often have a deadline associated with them, but not always.<\/p>\n\n\n\n

You can add sinking funds to your budget <\/a>for expenses that come at the same time each year or to plan a big purchase you want but don\u2019t necessarily need \u2014 like a new couch for your living room or that piece of exercise equipment you\u2019ve been eyeing for months.<\/p>\n\n\n\n

Either way, sitting down with your calendar and noting upcoming expenses is a good way to get ahead of predictable costs and prevent unwanted debt or dipping into your emergency fund.<\/p>\n\n\n\n

How do sinking funds compare with other savings accounts?<\/strong><\/p>\n\n\n\n

A sinking fund is different from other kinds of savings accounts \u2014 like an emergency fund<\/a> or a traditional savings account \u2014 in a few ways. An \u201cemergency fund is for true emergencies, and then your sinking fund is for a dedicated, expected planned purchase in the future that we know is coming,\u201d says Miko Love, an accredited financial counselor and creator of The Budget Mom, a website with resources to help people create and stick to a budget<\/a>.<\/p>\n\n\n\n

Because they have different purposes, separating sinking and emergency funds is wise.<\/p>\n\n\n\n

\u201cI do think it is kind of a good idea to separate out your emergency fund from a sinking fund just because otherwise it is a little bit tempting to dip into your emergency fund for things that aren\u2019t really emergencies,\u201d says Madison Block, a marketing communications and programs associate with the nonprofit American Consumer Credit Counseling agency.<\/p>\n\n\n\n

Sinking funds also differ from traditional savings accounts because they have a specific goal and target deadline. That helps you track progress on multiple goals while putting all your savings into one large pot can get confusing and make you lose sight of your goals.<\/p>\n\n\n\n

The strategy behind sinking funds<\/strong><\/p>\n\n\n\n

Most sinking funds have a target date, and with this deadline \u201ccomes a strategic way to plan responsibly for that purchase,\u201d says Love, who currently has 13 sinking funds. For example, if homeowners association fees are due in May each year, you can start planning ahead to have the cash on hand.<\/p>\n\n\n\n

Let\u2019s take the HOA example: If annual dues are $500 and you have six months to save, you need to put about $83 a month in your sinking fund. Or roughly $42 per paycheck if paid biweekly. Or $21 a week. As you can see, it\u2019s highly customizable.<\/p>\n\n\n\n

You can also use windfalls like tax refunds or gift money to boost these accounts and reach your goals faster. Just keep in mind: Put money into sinking funds based on priority and necessity<\/a>. Required fees or memberships should come before wants, like a new couch or exercise bike.<\/p>\n\n\n\n

If you have leftover money in a sinking fund, either keep it there so you\u2019re ahead of the game for next year, reallocate it to the next priority or pad your emergency fund, if needed.<\/p>\n\n\n\n

Can you have too many sinking funds?<\/strong><\/p>\n\n\n\n

The trick with sinking funds is striking the right balance. \u201cYou can absolutely overcomplicate your finances by having too many of these sinking funds,\u201d Block says. You might find that having multiple savings buckets to fund with each paycheck feels overwhelming. Setting up autopay might be one way to help streamline things. Some banks offer customers the ability to customize savings buckets within their accounts.<\/p>\n\n\n\n

Figuring out your top few priorities and setting up sinking funds is a good start. \u201c[Y]ou probably don\u2019t really need a separate sinking fund for every single little expense that you are anticipating,\u201d Block says. You can always add more sinking funds if you find this strategy works for you.<\/p>\n\n\n\n

Are sinking funds right for you?<\/strong><\/p>\n\n\n\n

This is a low-risk strategy for saving for expected future costs. \u201cI believe sinking funds can be for anybody no matter where they are with their finances,\u201d Love says.<\/p>\n\n\n\n

Managing sinking funds also \u201ctrains us to create healthy habits in our lives to prepare for the things that are putting us in debt,\u201d Love says.<\/p>\n\n\n\n

This article was written by NerdWallet and was originally published by The Associated Press. <\/em><\/p>\n\n\n\n

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