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What are Sinking Funds?
In short, sinking funds are small amounts of cash that you accumulate to achieve a financial goal or pay for something specific.
For example, we all know that Christmas is a costly holiday. If you spend $1,000 on Christmas every year, do you make sure to budget for it every November when you shop? Most likely not!
The point of a sinking fund is to set aside specific amounts of money for specific higher-dollar items, vacations, and events.
Sinking Funds vs Emergency Funds
Both emergency funds and sinking funds prepare you for life events that could put strain on your finances.
Emergency Funds
An emergency fund is money set aside solely for when emergencies arise. When you have money set aside, you won’t need to use credit or dip into your hard-earned savings.
Some typical emergencies that you should have an emergency fund set up for, include:
- Car repairs
- Home appliance replacements
- Sudden job loss (many advocate for 3-6 months of lost income)
- Unexpected vet visits
Sinking Funds
A sinking fund is money set aside for events, holidays, and items that you specifically are saving up for. Many people have their emergency fund in one lump sum, while with sinking funds, you can have as many separate funds as you want!
Here is a list of common sinking funds:
- Saving up for a vacation
- Birthdays throughout the year
- Wanting a new vehicle
- Accumulating cash for a home down payment
- Christmas expenses
In a typical budget, it can be difficult to specifically budget for each holiday, birthday, and save for all the large expenses throughout the year. Sinking funds provide a way to separate these events or items that you want to save for, and help you not overspend!
Why Millennials Need Sinking Funds
As a millennial myself, I know that sinking funds is a new term, and that it is rare to find peers who budget their finances well enough to utilize sinking funds.
It is important to millennials to learn to use sinking funds because this generation is now old enough to be earning and handling larger sums of money, while being bombarded by spending culture and digital methods of spending.
Unfortunately, millennials also have high amounts of student loans and debt. By strategically planning for your year’s spending, the amount of financial stress burdened us millennials experience can be significantly reduced!
3 Top Reasons Millennials Need to Use Sinking Funds:
- Smarter spending – By allotting yourself specific amounts of money for holidays, for example, you will be much less inclined to overspend.
- Better control over your finances – It can be confusing when you try to save up for specific things within your normal savings accounts. Sinking funds allow you to visually track your savings.
- Setting a plan for the future – Sinking funds allow you to save for expected events. By building this habit, you’ll set a positive path forward that will be far more controlled and far less stressful.
How Millennials Can Begin a Sinking Fund
3 Steps for Millennials to Use Sinking Funds to Save Money Every Year
- Decide on Your Sinking Funds
What do you want to save up for? What costs you a lot of money each year?
Write down everything you plan to begin saving for! - Pick Your Method of Sinking Fund
Do you want to compile cash into a separate savings account? Do you want to use cash only? Do you need written or visual cues to know how much you’ve saved?
Decide on the method of sinking fund you’d be most successful with! - Regularly Save Money With Each Paycheck
You need to decide how often you will contribute to your funds! Most people contribute to a sinking fund every paycheck.
If your Christmas is 5 months away and you need to save $500, then you need to set aside $100 per month into your “Christmas Sinking Fund”.
Depending on how many sinking funds you have, you may be surprised at how much money you need to spend and save each year.
There are multiple “methods” to using sinking funds. I personally use paper trackers and digital bank accounts, but I will review the most common sinking fund methods below.
Coloring Sheets per Sinking Fund
Using coloring sheets as a visual reminder is a great option for millennials who are new to sinking funds or budgeting.
You can find examples of these for free across the internet, especially on Pinterest!
(Stay tuned for new coloring sheets on this blog!)
Cash Envelopes for Each Sinking Fund
Cash envelopes are a popular way to set aside physical cash for sinking funds. You can also find free printable cash envelopes on Pinterest.
The key with using envelopes is using actual cash. Using cash has been shown to reduce overall spending and build better habits around money.
The cash envelope method is great for beginners, as it can help you create a better mindset around your money and make smarter spending decisions!
Visual Trackers for Your Combined Sinking Funds
I personally use printable trackers for my sinking funds. These can be charts, graphs, or color-in pages that represent all of your sinking funds.
This helps me to both have a visual reminder but also have all of my funds in a quick-to-reference page!
3 Tips for Successful Sinking Funds
- If you are using one savings account for an accumulation of the money for your sinking funds, pair it with another visual method in order to separate the funds.
- Use cash envelopes if you are brand new to sinking funds – it can help prevent overspending
- Get your spouse and children involved by having them set up their own sinking fund! Cash envelopes is a great option to kids to save up money for toys or outings that they want.
How to Get Extra Cash for Your Sinking Funds
#1. Quick Ways to Make Extra Cash
I discovered survey sites awhile back and have been able to make a handful of extra cash to save up for expenses.
Now, this won’t pay for all your bills and expenses, but being able to save up a sinking fund by simply filling out surveys is pretty awesome!
I know of people who use dozens of survey sites, but I only stick to two. (Honestly, I just don’t have a ton of free time to use more than that.)
If you are interested in learning more, I have a step-by-step article here about how to earn with one of my favorite survey sites!
If you want to double your earnings, check out both of my two favorite apps:
#2. LEARN Exactly HOW TO SAVE CASH
I use a popular free app called Acorns to set aside money for a sinking fund.
Acorns works by linking to your bank and helping set aside “cents” to a savings account after you make purchases.
This is a different method to save up money, but it is a great option for someone who has difficulty physically setting money aside for their sinking funds!
If you’re interested in learning how Acorns can be a great option for quickly saving up cash, go get your free $5 credited to your account here!
#3. KNOW YOUR CREDIT SCORE WELL
Understanding your credit score is a critical part of understanding your personal finances!
My best piece of advice is to know your credit score before starting to save up money and set up sinking funds.
I use Credit Karma, which I’ve loved for years! Not only is it free, but checking your credit score through them won’t make any difference on your score (unlike some other services out there!). You can learn about how Credit Karma can check your credit score for free here!
#4. TRACK YOUR SPENDING!
For starters, using sinking funds is a method of budgeting! However, if you do not already track your expenses and income, it’s highly recommended that you begin!
I use a free, beginner-friendly platform called Personal Capital, but any will do!
Once you input your assets and liabilities, you’ll have an idea of your net worth. This is an important step for this process!
You can then set up a budget and track all of your income and expenses!
I put together a full review of how this app works and the benefits I’ve have using it over the past few years. You can learn more about Personal Capital through my in-depth review here!