So you've bought into the "no-debt" lifestyle. Everything is going great when suddenly you're faced with a high ticket purchase.
There's not enough in your budget to cash flow it, and you definitely don't want to charge it. So what do you do?
The answer is pretty simple. In fact, you probably already know what it is. Handle it the way your grandparents did; pay cash.
Whether it's an expensive article of clothing, or a new car, using sinking funds to save money will save your budget and keep you out of debt.
What is a Sinking Fund?
A sinking fund is a savings created by putting small amounts of money away over time to pay for a large purchase.
You may have many sinking funds incorporated into your budget at the same time. For example, you may be saving up for:
How to Budget for One or Multiple Sinking Funds
Decide on the amount of money you will need to purchase the item(s).
Divide the amount by the number of weeks or months you wish to make the purchase by.
Save that amount each week or month, depending on how much time you have allotted for the purchase.
You wish to have $600 to spend on Christmas, and you start saving in January. To determine the amount you will need to save each month, divide $600 by 12 months:
$600 / 12 months = $50/month
Therefore, to have $600 by Christmas, you will need to save $50 each month towards this sinking fund.
Why Should I Use a Sinking Fund?
Using this method to budget your savings for a large purchase in the future will help you avoid using your credit card and stressing about having to pay it off in the future and possibly damaging your credit score if you fail to pay on time.
Managing an organized sinking fund keeps you in control of your savings and allows you to make large purchases stress-free and prepare for unexpected expenses, such as car and home repairs.
Where Can You Keep Your Sinking Fund?
At the Bank: This is the safest option for large sinking funds; for example, savings toward purchasing a car. You can have one savings account for all your sinking funds. All you need to do is keep track of how much you have saved towards each fund. You can keep track in a spreadsheet or on paper.
In an Envelope: This method is good for small funds. You can put cash into the envelope, label it, and keep it hidden away or locked in a safe. This method is beneficial if you have problems tracking how much money goes to each fund. Having a labeled envelope for each fund gives you a visual on how much you have saved towards each purchase.
Of course, if you feel uncomfortable keeping money in the house, you can keep it at the bank in your savings account. The key is to stay organized, keep track of your funds, and only pull out the specified amount you saved for the item when it is time to make the purchase.
How to Manage Your Sinking Fund:
Pick an amount you need to reach.
When you reach your goal, stop saving.
If you use a sinking fund that needs replenishment, start saving again as soon as possible. For example, if you have been saving for potential car repairs with a reached goal of $500 and you spend $300 of the $500 you have saved, start saving again after the repairs until you reach your goal again. Continuing to save for funds like this is an effective strategy because you usually cannot predict when you will need to use the fund.
Many budgeting software applications have tools to integrate Sinking Funds into your budget. To save successfully, find a tracking method that works best for you and determine the best place to keep your sinking fund that suits your needs.