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How You Can Use a Sinking Fund

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A sinking fund is a simple budgeting method that allows you to prepare in advance for future purchases and allocate a certain amount each month or week to pay for these. 

Have you ever felt like sinking into the ground after splashing out on a long-desired purchase? Let’s face it, we’ve all been there. A sinking fund can help you be prepared for larger expenses.

What Is a Sinking Fund? 

Dave Ramsey, a well-known financial advisor has suggested using the sinking fund method.

How exactly does a sinking fund work? 

Let’s say you are looking to buy that $1,000 laptop – for your spouse, of course – by Christmas.

  • If it is April, a sinking fund has 8 months left to work its magic.
  • Divide $1,000 by those 8 months and you get a set amount of $125 to put aside per month for that category. 

Is a Sinking Fund the Same as General Savings? 

Unlike general savings, a sinking fund gives you a specific purchase goal and a way to get there.  

Savings accounts may be used for anything under the sun. Whereas a sinking fund is an allocated amount of money intentionally set aside to pay for, say, that outfit for a friends’ wedding, or new tires.

What About My Emergency Fund | Does That Need To Change? 

A sinking fund can be a game-changer, but may not be as crucial as 3-6 months saved in an emergency fund.

Basically, an emergency fund is a safety net for the unknown expenses that life may throw. A sinking fund is a deliberate saving for a known and specific cause. 

How Does a Sinking Fund Fit on a Budget? 

It may be as simple as adding a line to your budget and reallocating expenses from there, depending on what you are saving for. 

The following are 4 key steps to implementing a sinking fund: 

1. Identify What You Are Saving For

Identifying what the purchase is and the exact cost has to be step number one. Larger expenses such as roof repairs or family vacation are a good idea to prepare for months in advance. 

2. Choose Where Your Fund Will Be

Whether in the form of an envelope of cash or an interest-bearing savings account, a sinking fund gives you the flexibility to control the amount kept aside. 

However, be mindful of bank fees if you create a specified account, as these can inch up your expenses over time.

On the other hand, if you decide to keep a fund in the form of physical cash, ensure the security and the safety of where that will be stored.  

3. Decide How Much To Save 

It is necessary to decide how much you need and how much you are prepared to save. Take that total amount and divide it between the number of months or weeks you have left before the purchase date.  

https://www.forbes.com/sites/jimwang/2020/01/24/6-reasons-to-start-a-sinking-fund-now/

You can also decide what months you will or won’t have enough left over to devote funds. This allows for flexibility if you are a variable income earner. 

4. Add a Line To Your Budget

Regardless of what kind of budget you have, by adding a row or line specifically for your monthly or weekly payments towards your end purchase, a sinking fund can easily be implemented. 

Having a sinking fund does not have to, and, ideally, should not replace debt repayments, savings, or emergency funds.

A Simple Method

Starting a sinking fund is a simple and transparent means of regaining better control overspending, and keeping some certainty over the future. Avoiding credit debts and loan repayments can alleviate worry and guilt, and elevate your peace of mind. 

Helpful and Free Online Calculators

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When it comes to improving your finances, free tools and resources should never be turned down. Especially when they’re available online and can be accessed 24 hours a day from anywhere on Earth. Here are a few free online calculators that will help you in many different areas of your financial life. Whether provided by the federal government, nonprofits, or privately owned entities, online calculators are particularly useful when it comes to finding ways to eliminate wasteful spending and figuring out ways in which you can keep extra cash in your pocket.

While countless online calculators exist, the following six are some of the most useful out there. Check them out and see if you can cut spending and increase your debt repayment and/or your investments for retirement.

Bloomberg Retirement Calculator: Whether you’re planning on living independently until the day you die or expect to utilize the services of Brookdale Senior Living or other nationwide retirement communities, you need to make sure you’re putting enough away to ensure you can make your particular plan actually happen. Use this retirement calculator to run your numbers and see if you’re really doing enough today to guarantee a satisfying life tomorrow.

IRS Withholding Calculator: While the springtime refund from Uncle Sam is an awesome injection of much-needed cash, there’s never a guarantee that you’re getting everything back you deserve. If you’re withholding more than necessary you are giving the government an interest free loan while shorting yourself throughout most of the year. While you want to always make sure you are withholding enough to avoid owing an enormous amount of money to the government, use the withholding calculator to avoid paying too much and losing the use of that extra cash.

Federal Reserve Credit Card Repayment Calculator: Whenever the day comes when you finally pay that credit card off, how much interest will you have paid thanks to months and years of low monthly payments? To look into the future and find out, put your monthly payment, the amount you owe, and the APR into a credit card repayment calculator. If you receive slap in the face, use it to rethink your current payment plan and to devise another. The more you pay each month the quicker you’ll pay them off and the more you’ll save in the long run.

FinAid.org Student Loan Calculator: Going back to school is one way to increase your ability to make more money in the long-run. But avoid recklessly taking out student loans without first stopping to see how much you’ll be paying upon graduation. There’s no point in getting educated to make more money if you’ll be swamped by student loans while beginning your new career. Use a loan calculator to get a good idea of the realities of borrowing for school and to do it responsibly. Always remember, you’ll have to pay those loans off someday so be careful.

Department of Energy Fuel Economy Finder: There’s no doubt about the long-term fate of fuel prices. Gasoline will continue to get more and more expensive, and as a result more and more of your money will go toward transportation costs. Before buying your next automobile, use a fuel economy calculator to determine which vehicle in your price range will be most fuel efficient. Apart from the safety of a particular make and model, this is the most important aspect of buying a new car.

Department of Energy Home Energy Saver: As unbelievable as it sounds, it’s estimated that more than half of the energy Americans use annually is wasted. This is on account of poor energy efficiency in the home. To limit the amount of money wasted every year on energy, use this incredibly detailed energy saving calculator built to be used for free by any American with an Internet connection.

Again, anyone serious about saving money and better managing their personal finances can benefit from the use of these free online calculators. These useful tools can make the difference between thousands wasted annually and thousands saved in the same amount of time. Indeed, you have nothing to lose by at least giving them a try. Despite how much of a personal finance guru you consider yourself to be, you’ll never know if you could be doing better until you take a look.

15 Ways to Reduce Core Expenses and Debt

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Being in debt can often feel like living in an inescapable hole. Unless you’re pursuing medical or law careers or a high-paying business idea it’s often difficult to insure your earnings will match or exceed your expenses and debt. As a result, the debt isn’t paid off and the interest keeps on accumulating. The hole grows deeper and deeper.

Of course, reducing your expenses is always a prudent way to put more money toward debt payments. However, many times when people look to reduce expenses they focus on peripheral costs: forgo vacations, stop going to the movies, eschew coffee or alcohol, and/or try to spend more responsibly on their children. There is nothing wrong with making such cuts, but no expense-reduction strategy is fully effective without a concerted effort to lessen one’s core costs. Core expenses include food, shelter, and transportation – the necessities of modern life.

When I was struggling to emerge from debt, I focused primarily on cutting my core expenses and was able to pay off debt far faster as a result.

Here are the 15 main tips and techniques that I used to save money and pay off debt:

Save on Food

  1. Eat out only for special occasions.
  2. Buy store-brand products.
  3. Plan out all meals beforehand, and then buy only the necessary ingredients when shopping at the store.
  4. Eat meals high in low cost products that contain high nutritional value (rice, beans, eggs, tuna).
  5. Buy non-perishable items in bulk.
  6. Become a vegetarian.

Save on Shelter

  1. Install energy-efficient lights and a smart thermostat to reduce utilities costs.
  2. Insulate the walls and attic of your home to make it more energy-efficient.
  3. Take in subletters or find a roommate.
  4. If possible, downgrade to a cheaper home or apartment.

Save on Transportation

  1. Run or bike to work instead of taking the car.
  2. Use public transit whenever possible.
  3. Utilize websites like gasbuddy.com to find the lowest gas costs in your area.
  4. Plan out trips and errands so as to minimize the amount of driving required.
  5. Downgrade to a cheaper insurance plan that offers basic coverage

These are fifteen main ways I cut my core expenses while in debt. It wasn’t easy at times – many of these cuts certainly required a sacrifice on my part – but it was worthwhile in the end. If you’re looking to emerge from debt quickly, sacrifice is the quickest way to get there.

Use these tips along with other creative ideas you come up with and you’ll be able to reduce your expenses and your debt!

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