Unexpected expenses can create a great deal of stress. When you need to come up with the money for a household or auto repair, you may have to scale back on other expenses. This creates a difficult cycle that can be challenging to break out of. The alternative is to use credit, but carrying credit card debt isn’t great for your financial health. If you’re looking for a way to better manage unexpected or periodic expenses, consider using sinking fund accounts. They allow you to build savings for targeted expenses. When you need to spend the money, it is there. You won’t need to withdraw it from your general budget.
Finding Money for Your Sinking Fund Account
Find money to build your savings by lowering your monthly expenses. Remember, these funds are going toward something that you would spend them on anyways, you’re just breaking the cost down into manageable-sized payments and prepaying into dedicated savings. One way to lower your monthly expenses without giving anything of value up is to refinance your student loans. When you refinance student loans with a private lender you can save money and have a lower monthly payment. The lower student loan refinance rates can be used to redirect savings into your sinking funds.
Another low effort way to save money without changing your lifestyle is to make sure you’re getting the most out of your credit card rewards. The average American misses out on $200 each year in rewards because they aren’t using a card that matches their lifestyle! Clyde finds your best credit card based on how you spend. The best part is the AI shows you an estimate of how much you are likely to earn for each card. You no longer have to be a ‘points maximizer’ to get the most out of your everyday spend.
Keeping Track of Your Sinking Funds
Should you keep this money in your general savings? In most cases, the answer is no. You don’t want to risk mixing these funds and if you make it difficult to keep track of the different balances, you will have trouble making this method work. With the wide variety of banking options, both online and in-person, that are available, setting up several different accounts to house your sinking funds is simple and only takes a few minutes. Make sure to select one that doesn’t require a minimum balance, this way you won’t pay a penalty when you need the money.
One exception to this is if your bank allows you to split your savings into different categories. Often called buckets or envelopes, you direct the money you deposit, either by dollar amount or percentage, into various categories. Although the money is all in one place, you can tell at a glance how much you have in each category.
How Many Accounts Do You Need?
If you are wondering how many separate accounts you need, think about the unexpected or periodic expenses you have faced over the past year and that you anticipate in the coming year. Include large purchases, such as a new vehicle, unexpected expenses, such as replacing your computer, and overlooked costs, such as annual property taxes or insurance bills. Once you have an idea of the various accounts you need, set them up. Determine how much you hope to save annually in each category, divide that number by the number of paychecks you get annually, and you know how much you should deposit to meet your goal.
Of course, some people have more complicated financial pictures. If you work on commission or receive bonuses as part of your compensation, the answer isn’t as clear-cut. It may be easier to meet your goals by depositing a percentage of your income rather than a dollar amount. It may take a little trial and error to get it right, but starting and funding sinking accounts for unexpected expenses can make managing your finances much less stressful.
Need help managing your finances? Personal Capital provides a free budgeting tool, net worth tracker, investment analysis and more!
Samantha uses her BS in Finance and MBA to help others control their finances through budgeting, saving, investing, side hustles, and travel hacking. Due to following the FIRE Movement’s principles, she was able to quit her high-stress job in the financial services industry in July 2019 to pursue her side hustles. She is now a full-time entrepreneur, freelancing coach, and blogger.