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I’ve mentioned this in my Monthly Budget Blog. I’m not a financial expert. I’m not even a financial amateur. I’m whatever comes before financial amateur – financial newbie? My budget journey to get my finances under control is fairly recent. Actually, to be perfectly honest, it’s still in its infancy as I started a couple of months ago (January 2019).
In this journey, each step has been overwhelming and stressful. I’ve done a lot of research online, via Pinterest, and YouTube and perhaps that has been part of the problem. Information overload can make a confusing situation even worse. But in the few short months, I’ve picked up a few tidbits of knowledge that I thought I would share. By no means am I an financial expert and will never give you any financial advice. But I’m hoping that the bumps I’ve encountered will help you in your own journey.
Debt Free Journey
What’s important to understand about doing a debt free journey (regardless of the method you choose: Dave Ramsey, Rich Dad-Poor Dad, Every Dollar, YNAB, 50/20/30 – I can do a separate blog on the differences) is that you want to move away from relying on credit cards or increasing your credit card debt so that you control where your money goes vs. accumulating interest and additional debt. I’m not anti-credit card but since most of my income goes to debt I want to put myself in a better financial situation. I’m in my 40s and so not only am I thinking about debt but I’m also thinking about retirement.
Savings vs. Sinking funds
If you’re new to a debt free journey, sinking funds might be a brand new term for you. It certainly was for me. I think it originated with the Dave Ramsey system although from what I’ve seen, there are versions of it in various debt free programs. Simply put, a sinking fund is a savings for a predetermined upcoming expense (as opposed to an emergency fund that is set up to cover unexpected expenses but that is a topic for another blog).
A savings account give you the power to store away money in an account that hopefully earns some interest. The way that I understand a savings account is that it just a pool of money that will stay, earn interest, and grow. It isn’t earmarked for any upcoming expenses and isn’t part of your monthly or annual budget.
Sinking funds give you the power to set aside money for an anticipated expense that’s going to happen in the future and not necessarily a budget item for the current month. A sinking fund can be a line item in your monthly budget or can be funded as funds are available. I think some of the confusion I had with sinking funds is that I don’t have a lot of money to set aside for this. But ultimately, even if I don’t have my entire Christmas fund fully realized by the end of the year, I’ll have some money to defray some of that cost. Basically, you want to be able to help yourself avoid putting more debt on your credit cards.
Possible Sinking funds categories:
- Car maintenance
- Car registration
- Medical expenses (co-pays/prescription)
- School clothes
- Next year’s tuition
- Household expenses
- Amazon Prime annual charge
- Gifts (Christmas, birthday)
Targeted Savings Categories
It seems simple but having sinking funds can be a very powerful tool in your budget arsenal. If you know that Amazon Prime will be due at the end of the year (we’re currently in March) and is $110, you can divide that by the number of months, paychecks, etc. that you have until you hit that deadline.
$110 / 9 months before the charge is due = $12.22
Therefore, if you set aside $12 for the next 9 months, you’d have $108 saved for the Amazon charge when it comes due! Clearly it isn’t the full amount, but it’s most of it and not $110 charge that you have to come up with out of no where. As mentioned previously, if you can anticipate and save now for an expense that will happen in the future, you lessen the chances that you’ll need to put the expense on a credit card.
This can be even more powerful if you’re saving for a very large expense. Eventually I’d like to buy a new laptop or desk top. I’d like it to have all the important bells and whistles (as well as lots of speed and memory) which might run one or two thousand dollars. If I start a sinking fund now, perhaps in a year or so I could (depending on how aggressive I am with sinking the funds into this category) I’d have most if not all the funds to pay cash for a new computer with no additional debt WITH NO ACCUMULATING INTEREST.
Free Sinking Funds Printable
Since I’m new to my debt free journey, I’m trying to make systems and templates that work best for me and the way I budget. I’ve included a free Sinking Funds Printable with this blog that you can use in your own debt-free budgeting journey. Check out my YouTube video as I work on my Sinking Funds to see how I use this format.
Sinking Funds Set up YouTube video: