After I started my first job when I was a teenager, I setup a savings account to stash my paychecks. Then I setup a spreadsheet where I would categorize my dollars into different groupings. To this day I have no idea what sparked the idea, but when I stumbled into ING Direct (now Capital One 360) it made creating sinking funds so much easier.
What are sinking funds?
A sinking fund is a separate savings account (or accounts) where you set aside money in advance for a specific purpose. The savings account is separate from your regular savings account or emergency fund.
For example, you may save a portion of each paycheck into a separate savings account so you can pay your car insurance every six months. Instead of having to scramble to pay a big (annual or semi annual) bill, you save it in advance so there’s money ready to pay it when it comes due.
I was using this approach to save for my bills in advance before I heard of the term sinking funds.
Tips when setting up sinking funds
Setting up sinking funds are pretty easy. You need to setup a few extra savings accounts and figure out how much to save with each paycheck. Here are a few additional tips to keep in mind.
Choose a bank (or two) wisely
The two important parts of choosing the right bank for sinking funds is one that:
- Allows you to setup multiple savings accounts easily
- Doesn’t charge fees for maintaining a balance.
And bonus, if the banks also offers a free checking account with electronic bill payment even better. You can pay the bill directly from that bank by transferring the money out of the savings account to the relevant checking account quickly.
Two banks to consider setting up your sinking funds include:
- Capital One 360 (previously ING Direct)
Both allow you to setup multiple savings accounts for free and you can setup a checking account with electronic bill pay features. These banks likely pay a higher interest rate compared to your bank down the street.
Know how much you need to save each check and stick to it
Each sinking fund will depend on how much money you need to save and how much time you have to save it.
Consider the following example, you want to save for your car insurance bill ($500) that’s due in 6 months (maybe 13 paychecks). $500 divided by 13 is $39.
Each paycheck you need to save about $39 into your car insurance sinking fund in order to have the money ready to pay car insurance bill. $39 per paycheck feels manageable compared to having to dig $500 in a pinch or worse yet, having to pay an installment fee or credit card interest to pay the bill monthly.
Depending on when you start versus when the next bill is due, you may need to adjust this a little bit. Double check your calendar!
Usually I plan a year in advance looking at how much I’ll pay for a bill and then dividing by 26 to come up with my per-check savings amount.
Sinking funds can save you money while earning you a bit more in interest. While it’s still probably pennies or a few dollars, those add up over time. And by having the money available to pay a bill when it’s due you reduce the need to pay installment fees or (credit card) interest. That’s a win-win in your favor.
My favorite sinking fund ideas
Anything that’s an infrequent bill or expense is a good option for saving a little bit at a time in a sinking fund. A few of the sinking funds that I have setup include:
- Car insurance
- Homeowner’s insurance
- IRA (pre-saving your annual contribution)
- Property taxes
In addition, you may also want to setup sinking funds for:
How to keep track of what you need save into each sinking fund
You will need to find the right method for you to keep track of your sinking funds. Here are a few ways that have worked for me.
Setup a recurring task in a to-do list to remind me every other Friday (payday) to save an amount of money into a specific account.
Every payday I would receive a reminder email from Remember The Milk of my tasks for the day: save money into different accounts. To keep it easy I could check each task as done and the tasks would recreate for the future paycheck.
Setup a bullet journal spread of your per check savings tasks and a tracker to make sure you do them
When I started trying bullet journaling, I decided to setup a spread so that I could visually see how I was doing with each of my goals. With this method you need to be proactive to make sure you do all of your tasks compared to a reminder that pops up to remind you.
Over to you. Do you think sinking funds will help you prepare to pay your bills stress-free? Or where you already doing it without knowing the term?
Honestly one of the first things I do on payday is pay myself first by transferring money into each separate sinking fund. Having done this for years, I greatly reduced my stress about paying my bills since the money is usually ready and waiting when the bill comes due.