Planning for unknown emergencies is just as important as planning for expected upcoming expenses. When equipped with foresight and a little extra discipline, it’s possible to live your best life and avoid any guilt for dropping those big bucks. It’s time to sink or get sunk!
WHAT IS A SINKING FUND?
A sinking fund is money we set aside each week, paycheck, or month with the intent of spending it on something in particular. That’s where the name “sinking” comes from. The fund will eventually sink – or get spent.
ISN’T THIS JUST AN EMERGENCY FUND?
When you set up a sinking fund, it’s with the expectation and a particular goal in mind. Think; Celebrations like holidays, birthdays, weddings, or travel, including short weekend trips and extended vacations, summer camp, or a trip to Rimrock mall for some new clothes or a trip to your tax consultant. You’ve made plans for these events and have chosen to spend money.
Emergency funds are for precisely the opposite – things you did not necessarily choose to happen and now have to. Something like a flat tire or a trip to the ER for a broken bone – we don’t spend this saved money until it’s necessary. It’s also essential to replenish an emergency fund as soon as you’ve used it. A sinking fund can stand to go empty every so often until a new goal comes around.
A great place to keep our sinking funds is in an online savings account. Online savings accounts are ideal because they are out of sight, out of mind, automated, free, and they earn interest.
HOW MUCH DO I PUT TOWARD A SINKING FUND (AND HOW OFTEN)?
If you’ve got an idea of what something will cost, you can work backward. If you’re unsure what something will cost, make an educated guess. I recommend checking in on your sinking funds at least once per quarter so you can reassess and adjust if you have more information.
It’s all about your preferences. Do you prefer to transfer money over each week or each paycheck? Do you choose to do it monthly and schedule the transfer during the time of the month when you don’t have more massive bills like rent or mortgage? The key to consistency is to automate all of your deposits. (Yup, that’s something you can do inside your Altana Online Banking account.)
USING THE FUNDS FROM YOUR SINKING FUND
You’ve got options when it’s time to make a planned purchase.
You can transfer the amount of money from your sinking fund in advance, so it’s available in your checking account when you make the expense. (It might feel overwhelming or tedious to transfer money over all the time. You may decide to look back at the past week and determine how much to move over from your sinking fund.)
If you want to charge your credit card and get points, we won’t deny you that! However, we highly recommend following up with a transfer from your sinking fund to pay that part of the balance immediately.
It can be tempting if you have enough cash to use what you’ve got in your checking account. But, that can cause more money stress because you’re without the typical money for your everyday expenses. Helpful hint: If you end up with extra funds a lot, it might be a sign; you can transfer more money over to build your emergency fund or to put toward other savings goals!
It’s helpful to reassess our sinking funds every few months as we gain more clarity surrounding our plans. As we get closer to the time to book a flight, we have a better idea of prices. Once we decide on Airbnb, we know exactly how much it will cost. We can reassess and readjust our automatic transfers as needed by checking in on our sinking funds.
Having sinking funds for our less frequent, significant expenses makes our lives easier and less stressful. Putting aside $35 per paycheck feels a lot different than spending $910 all at once. By preparing ahead of time, you’ve reduced the chance of over-drafting (and the fees) or having to pull from your hard-earned savings and eliminated a lot of finance-related stress.