I am not a financial advisor. Just spreading some knowledge. All thoughts and weird opinions are my own.
I don’t know why every single year around the holidays I go into this panic. I’m lying…I do know why. Even though I know that Christmas comes around every 365 days, I always feel a huge sense of nerves when it comes to buying my loved ones gifts, and paying off one of my student loans.
Incase you haven’t been following my journey to debt free, then you’ve missed my show and tell last year on how I’ve been able to pay off 85,000 dollars in loans over the course of four years.
This year I was focused on paying off my debt completely, saving money, and still living some sort of normal life (I went on 8 trips for 4,000 dollars). This is when I stumbled on to sinking funds. And as with everything I learn about, I like to share the deets with you!
3 Reasons You Need A Sinking Fund
What Is A Sinking Fund: A sinking fund is essentially a savings method used to make a major purchase in a certain amount of time or pay off a debt. The reason that a sinking fund is slightly different than a regular savings account or emergency fund is because when you set up a sinking fund it is for a very specific time period and a very specific outcome.
1. To Help You Save Money For The Holiday Season: Like I mentioned earlier, Christmas always seems to catch me off guard even though I know it’s coming around every single year. I’ve set up savings for Christmas shopping before, and have always done it the wrong way. By using a sinking fund this year I’m more prepared for the holiday madness. In order to set up a Christmas Sinking Fund I’ve been saving 50 dollars a month since January. This means that by the time December comes around I will have saved 600 dollars for Christmas shopping. This by no means is a guarantee that I will spend 1,200 dollars on gifts, but it certainly means I will not spend more than 600. It also means I won’t have any Christmas credit card debt after the holiday season is over. It is a firm line drawn in the sand of my spending, and it also makes me be more creative with what gifts I purchase/ or make.
2. Helps With Your Budget Goals: Budgeting is not sexy, and it can be a real pain in the ass. But we all know the value and importance of doing it, even when it is difficult. By creating a sinking fund, you are mastering the patience of saving. Once you’ve mastered patience, your budgeting goals will be a lot easier to set and achieve.
With a sinking fund you are able to prepare the funds for predictable expenses that do not occur every month. Expenses like your vet visits, Amazon Prime renewal, water bill…etc. All of these expenses you know occur annually, semi-annually or quarterly. Instead of pulling the money out when it is due, you can save 25 a week specifically to pay off the balance of that expense. By adding the savings into your regular budget, you will be able to save more efficiently, and use your money in ways you didn’t even think about (ie… actually go on a vacation).
3. Helps Prevent Future Debts: This is my favorite reason you need a sinking fund. I am all about being financially free and having debt just doesn’t allow you to do that. Which means anything that gets me closer to financial freedom is on the top of my “to do” list. Having a sinking fund allows you to prepare for future expenses. When you are prepared for future expenses you can avoid falling into the trap of debt.
Christmas is the credit card companies dream time. That is when people are in the spirit of giving and forget they don’t have the funds to be having so much fun. With a sinking fund I plan on still swiping my card (because I want those reward points) and paying off the debt ASAP. It’s as simple as transferring the money over from the savings account to the checking or in my case right over to the credit card company.
There you have it… and if you aren’t convinced that you need a sinking fund just yet, think about it this way. You can set up a sinking fund for a potential vacation, new car, new home, or new iPhone. If that is not enough motivation I don’t know what is!
Until the next time!
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Hey there! I’m Melissa, co-founder of Trials n Tresses, natural hair and beauty lover, binge tv watcher and lover of life. When I am not creating content for TNT, I’m busy teaching the future of society.