We’ve all been there. Your car breaks down, or it’s the holiday season, or your daughter needs a new guitar for band class. You can’t afford it right now, and you know if you were a “more responsible adult,” you’d have been saving for this day all along. There’s something special about these cases that make you feel like a failure…
Except, you don’t need to bring yourself down just yet. The secret to super savers isn’t having an iron-clad sense of responsibility that the Queen of England would be jealous of.
Nope — you just need the right systems in place so that it runs in the background for you, automatically. These systems are called “sinking funds,” and we’ll tell you all about them, including how you can set them up so they can make your life so much more stress-free.
WHAT ARE SINKING FUNDS?
If you follow Dave Ramsey, you might have heard of sinking funds before. And while the Dave Ramsey sinking funds are popular, they’ve actually been used much further back — all the way to the late 1600s when Great Britain used them to fund the Dutch Wars.
Today, a “sinking fund” generally means a pot of money set aside for a specific purpose, and that you regularly save for.
A sinking fund is different from a regular savings account because:
- It’s separate
- It’s for a specific purpose
- You save money into it regularly (once a month, or whenever you get paid)
For example, if you’re like most people and you just have a checking account and a savings account to manage your finances, you can’t really keep track of all of those moving pieces you need to save for. If you have $1,000 in your savings account, would you be able to afford car repairs today? What about your daughter’s guitar in two months? The holidays in four months?
It’s too much to keep track of in just one account. So that’s why we split them up into sinking funds.
EXAMPLES OF COMMON SINKING FUNDS
There are two main types of sinking funds.
The first is for expenses you can plan for. You know when you’ll need the cash for these purchases, so you can plan out how much to save each month more easily. This includes things like:
- Birthdays
- Vacations
- Back-to-school
- Holiday spending
- Home improvements
- Non-monthly bills, like car registration, insurance, etc…
The second is for expenses that are a bit more….fuzzy. You don’t know exactly when these issues will pop up, but you know they’ll be there some day. This includes things like:
- Car repairs
- Medical bills
- Veterinary care
- Home maintenance and repair
- New technology, like a new computer, smartphone, etc…
- Expensive hobbies like woodworking or outdoor recreation
- A new car (if you’re not exactly sure when you’ll be buying it, that is)
- A house down payment (again, if you’re not sure when you’ll be buying it)
It’s important to note that you can use your emergency fund for some of these things as a last resort. But since you know these expenses are a part of ownership (either of your pets, your technology, or yes — even yourself), it’s best to have a better plan in place for them. Most financial experts recommend keeping your emergency fund separate for truly catastrophic things, like losing your job, or fallout from the coronavirus.
HOW MUCH SHOULD I SAVE IN SINKING FUNDS?
In an ideal world, we’d all love to save hundreds of dollars in each of our sinking funds each month. That way, we’d never have a care in the world again — we’d always have the money we need.
But in the real world, it’s a tricky balance between saving too much, and not saving enough. If you throw all your money into sinking funds as a safety blanket, that’s less you’ll have for other things, like groceries, retirement savings, and Netflix. Even Fun Money is important to have so you don’t turn into a robot, after all. We are human.
We’ll break this down into two approaches that you can calculate today, on the back of a napkin even if that’s your style.
HOW TO CALCULATE HOW MUCH TO SAVE FOR PLANNED EXPENSES
These types of sinking funds are the easiest to plan for because you know exactly when you’ll need the money. The only other thing you really need to figure out is how much you want to have saved by that date.
For example, I want to have $500 set aside each year for the holidays, and I want that money available by November so I can start shopping. Then, in January, I’ll start saving up again. This gives me 11 months to save up $500. To reach that goal, I need to set aside $45.45 each month into my holiday sinking fund, and viola! Come November, I’ll have the cash.
Here again is a brief summary of these steps:
- Figure out how many months you have to save
- Figure out how much you have to have saved by that date
- Divide your savings goal by the number of months to save
HOW TO CALCULATE HOW MUCH TO SAVE FOR UNPLANNED EXPENSES
Ah, now we’re getting into something a little bit trickier. It’s tough to know how much to save for something when a) you don’t know how much it’ll cost, and b) you don’t know when you’ll need it by.
Still, it’s possible to get a good estimate down. The best way to do this is to go through your past financial statements to see what you’ve spent on that thing over the last 12 months, or possibly even longer. Then, you can take an average.
For example, I have three pets (two kitties and a dog) who are all getting to be seniors. Last year, I spent a whopping $3,126 on vet care, thanks to several spendy treatments for my eldest cat, Beeker. Going forward, I should plan on saving at least $261 per month ($3,126 / 12), if not more, to make sure I’ll be able to afford their vet care in the upcoming year.
Again, here’s a brief rundown of these steps:
- Calculate how much you spent last year on these items
- Divide that number by 12
- Set aside that amount (if not more) each month going forward
HOW TO SET YOUR SINKING FUNDS TO RUN AUTOMATICALLY
Knowing how much to set aside in your sinking funds each month is great. But the really awesome thing about sinking funds is that you can actually program them to run entirely in the background, with no further input from you, until it’s time to spend the money.
This is the really powerful part of sinking funds; they can make 90% of your financial worries a thing of the past. And that, my friends, is definitely something to celebrate.
Here’s how to do it, depending on what you’re working with:
OLD-SCHOOL BUDGETING
If you’re still using a regular banking system (i.e., not Qube), you can do this a couple ways.
If you use a traditional line-by-line monthly budget and tracking program, you can simply set up line items for each of your sinking funds. Then, each month when you get paid, fill them up. This makes your budget a sort of de-facto sinking fund tracker. It also requires you to actually sit down and do it manually each month though, so it’s not really automatic per se.
Alternatively, you can set up a series of separate savings accounts — one for each of your sinking funds. Some banks place limits on how many savings accounts you have in place, so you’ll need to check with your bank. Then, set up automatic deposits into each of these savings accounts, for the amount you calculated in the above step. Schedule them for right after you get paid, and then you won’t even miss the money.
HASSLE-FREE WITH QUBE
If you’re using Qube Money, you’re already ahead of the game because it’s a lot simpler to set up automatic sinking funds. All you have to do is use the app to set up new Qubes — one for each of your sinking funds. Then, specify how much you want set aside with each paycheck. Each time you get paid, that money will be automatically divvied out according to how you specified.
The advantage of using Qubes versus any other program is that you can set it to happen automatically, each time you get paid. If you get paid on an irregular basis, for example, that can really come in handy. There’s also no transfer rules to set up and track like with your bank, so you can easily adjust it right in the app.
SET UP YOUR SINKING FUNDS TODAY
The beauty of sinking funds is that you can make a good chunk of your financial problems go away with just this one simple trick. It’s like those gimmicky ads you see on Facebook, except it’s real, and you can adapt it to whatever financial management system you use.
Another understated benefit of sinking funds is that they can provide you peace of mind and financial safety today. It’s all too easy to get a sense of hopelessness when you think about how much you need to save, especially when you’re starting from scratch.
Sinking funds are more about the journey than the actual goal. Even by setting aside $100 today, that’s $100 closer to financial freedom. That’s $100 closer to your goals, and not having to get that pit-in-your-stomach feeling when a new spendy expense pops up like an evil dragon in a video game. You’ll be prepared with your own Excalibur in the form of a sinking fund, so no sweat.
But in order to get those things, you need to start your sinking funds today. It just takes a little work to set them up so they run in the background going forward. With Qube, it’s extra-easy, so make sure you sign up for an account today.
