Pull up a chair, because we need to talk about why December keeps catching you off guard. Every year, birthdays, holidays, and car registrations happen at the exact same time. Yet somehow, we act surprised when the bill comes. If you are tired of putting expected expenses on a credit card, you need to learn about sinking funds.
A sinking fund is just a pot of money you set aside on purpose for a specific expense you know is coming. It is the opposite of an emergency fund. An emergency fund is for the unknown. A sinking fund is for the known.
Why You Need Sinking Funds Right Now
When you do not plan for big expenses, they feel like emergencies. But Christmas is not an emergency. Your car registration is not an emergency. When you use sinking funds, you stop the paycheck to paycheck cycle because you are no longer scrambling to cover these costs.
Instead of trying to find five hundred dollars in December, you save forty dollars a month all year. When the expense hits, the money is already there. You just pay it and move on. Organized money feels different.
How to Start a Sinking Fund
First, write down every big expense you expect in the next twelve months. Think about holidays, back to school shopping, car maintenance, and vacations. Second, figure out how much each one will cost. Third, divide that total cost by the number of months until you need the money.
That final number is what you need to save every month. You can keep this money in a separate high yield savings account, or you can use the cash envelope system to physically stuff the cash away. The method does not matter as much as the consistency.
Common Sinking Fund Mistakes
The biggest mistake is trying to fund too many categories at once. If you try to save for twenty different things, you will get overwhelmed and quit. Start with three to five major categories. Once you get the hang of it, you can add more.
Another mistake is dipping into your sinking funds for other things. If you pull money from your holiday fund to buy shoes today, you are just stealing from your future self. Keep the boundaries clear.
Your Financial Glow Up
For the woman who is done playing about her money, sinking funds are the ultimate flex. They give you permission to spend without guilt because the money was saved specifically for that purpose. Get your money together and start planning ahead.
Ready to organize your cash and hit your savings goals? Grab one of our Budget Binders to keep your sinking funds perfectly organized.