Your Complete Guide to Sinking Funds
Posted on July 25, 2022 at 8:07 AM by Noa Finken
Budgeting and sinking funds go hand in hand and are effective ways to manage your finances. In this post, we go over the basics of sinking funds.
Sinking Fund – Defined
A sinking fund is essentially money that you set aside for later to be used on expected or planned expenses. This is in contrast to an emergency fund, which is strictly used for unexpected expenses.
Each sinking fund should have its own category that you intend to spend the money on, such as car insurance or pet care. Read on for more sinking fund ideas.
There are several reasons why utilizing sinking funds can be beneficial for your finances.
First, it lessens the need to take money from your emergency fund or regular savings account and can save you from going into more debt.
Having sinking funds also helps you be prepared for future expenses well in advance. It would be a relief to know you can afford Christmas before you even spend a penny on gifts or have plenty of money to use on your upcoming vacation.
Starting a Sinking Fund
There are multiple ways to set up a sinking fund:
- Savings Account – We recommend opening a savings account that is separate from your emergency fund. At RVCU, you can set up automatic withdrawals, which allows you to easily transfer money from your checking account to your savings (sinking fund) on a set date.
- Money Market Account – Money market accounts have greater liquidity than a certificate account but still offer a higher APY than a traditional savings account. However, these accounts require a minimum balance of $5,000 to earn a dividend.
- Cash – Another option is to take out cash each time you get paid. One of the most popular methods for keeping track of this is the cash envelope system by Dave Ramsey.
Here are some ideas you can use for your own sinking funds:
- New Car
- Car Insurance
- Home Remodel
- Pet Care
- College Tuition
- Date Nights
Which sinking fund categories fit your lifestyle? Comment below with your top 2!
Stop in or contact us today for more information regarding the types of accounts we offer: (515) 232-1654
Categories: Saving and Budgeting