What Are Sinking Funds

You might be asking what are sinking funds and why do I need one in my budget? The reason is, if you don’t have an accurate budget set in place, those yearly expenses will throw you into a tailspin.

For more Personal Finance Articles and Budgeting Tips Read Here.

The more you are in control of your money, the less your money controls you.

By now you should have created your budget and starting an emergency fund of $1000.00 and you may be wondering what the sinking fund is and how does it compare to the emergency fund.

Read more about the Emergency Fund here.

What Are Sinking Funds?

Really the two categories don’t compare, they are two completely different funds. Your emergency fund is for one-time crisis events, such as, you need to fix the car, or an appliance gives out on you and you don’t want to pull out the credit cards.

Your sinking fund is for yearly purchases you need to budget for, but don’t fit into your monthly budget categories.

Make Sure you have downloaded the Budget Worksheet and filled it out. You need to do this with everyone in the household that have access to your spending accounts. That way everyone is on the same page.

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How Do You Start your Fund

First, start by writing down the ones you know offhand that apply to you. If you need to go back into last year’s budget or check register, write them down.

Here is a great book that goes more in-depth on your finances.

Now you have your list to choose from, add the ones you will be using and write them on a piece of paper or a spreadsheet. Get your totals from last year’s bank statements and fill in the total price next to each item.

Now divide that total into 12. This is the number you need to save each month in your budget for when these expenses come up. Believe me, they seem to come up at the most inconvenient time. There is a place in your budget to add this amount.

If you have them budgeted and the money put away in either an envelope or a separate bank account, you will be prepared.

I suggest setting up a separate savings account at your bank and having it automatically transferred on a specific date. You can do this online and don’t have to go to the bank. I transfer our holiday savings in the same way.

So let’s recap our steps:

How to Use the Cash Envelope Budget Method

Your Money Habits Control Your Budget

Now that you have all your critical funds set up to get an accurate budget set up, you may either notice a deficit or additional income in your wages vs. budget. If you have a deficit, you will need to increase your income.

No one wants to hear this but if you’re going to spend it, you have to earn it. I am not trying to be harsh or insensitive, I really care about your future.

If you have an excess of income, you can increase your monthly savings, your retirement, or work on paying off your mortgage. That is as long as you have no credit card or student loan debt. Remember to follow the baby steps.

It all comes down to habits and if you make that one decision today that you want better money habits you will have a better future and not have to live in fear or lack of security.

I will never forget the day when my Father passed away, and we realized my parents were living paycheck to paycheck without a thought of the future. This is the reason, I feel passionate about helping others.