WTF is a Sinking Fund and Why YOU Need Them!!

A sinking fund is really just a fancy name for a savings account, but there is one big difference. That difference is about what your intentions are for the money. This one thing that sets sinking funds apart from your regular old savings account is that the money in your sinking fund is for a very specific purpose. This usually translates into many different accounts, for many different purposes. Although some people choose to keep one account and track how much money is for each purpose in a spreadsheet. Personally, I prefer not to add the extra work!

One thing that may come as a surprise, is that I recommend starting to save using sinking funds even when you are focused on paying off debt. In fact, this is when they are the most important. Why? It gives you a huge advantage when life throws you a financial curveball, or what I like to call a Holy Shit Expense.

But Sherry, why the hell would I put money into savings accounts when I have debt? Shouldn’t I put every penny I can towards debt? This is a great question and I am going to answer by walking you through a very real potential situation and having you think how you will feel with the two different scenarios.

Think of your last large expense. Maybe it was a car or home repair, a large dental bill or even a vacation (not likely right now, but you get the idea). There are really two different ways one of these expenses can go.

1 - You aren’t financially prepared, you don’t have any money saved for this expense, you have no other option but to put the expense on a credit card. How do you feel about this? About adding to your debt? Close your eyes and really think about it. A big expense comes up and the debt you have been working so hard to pay off goes up, by hundreds or maybe even thousands of dollars.

OR

2 - You ARE financially prepared. You’ve been putting a little bit of money away each payday or each month earmarked for this exact expense. You have enough money saved to cover the large expense. You pay for the large expenses from your savings. Again, I want you to close your eyes and think about how you feel.

Now compare the two. They are two very different feelings. The first one brings up feelings of defeat, failure and stress. You’ve been trying to change. You’ve been working to pay off your debt, but this large expense makes you feel like it’s all for nothing. Why do you even bother? You feel defeated and like all your hard work has been for nothing. You throw your hands up in the air and think that budgeting is a joke and that it obviously doesn’t work for you. WHY. EVEN. BOTHER?!! Have you been there? Money brings up so many emotions in us, especially debt. Even if you’ve paid off $5,000 of debt in the last 6 months and this large expense is adding $1,000 of debt, it still feels like a huge step backwards.

Let’s think about scenario two and put it into numbers. Say you’ve paid off $2,000 of debt but have $3,000 saved. You have the same $1,000 large expense. While you obviously aren’t doing a happy dance about it, it feels very different. You take the money from your sinking fund to pay the $1,000 and barely even blink before you go back to your life. You’ve been planning for this, your systems are working and you are proud because you continue to see your debt go down.

Which situation do you want to be in the next time a Holy Shit Expense hits you?

If you answered the second one. I want you to take a few minutes to think about the sinking funds that you would like to have and then prioritize them. Which one(s) will you start with? Not sure if you have money to put into them each week? Sounds like you need a budget. CLICK HERE to get my free template and go put your money to work for you!

-Sherry :)