Are you living paycheck to paycheck, or feel like you’re squeaking by each check to pay your bills? Let’s cut the stress by using a sinking funds approach to pay your larger bills and expenses.
When I started my first teenage job, I opened a bank account to save money from my paychecks. Then I set up a spreadsheet to categorize my dollars into different groupings. While I don’t remember what sparked the idea, online savings account such as Capital One 360 have made it easy to create sinking funds.
What are sinking funds?
A sinking fund is a savings account to set aside money for a specific purpose in advance. This savings account is separate from your emergency fund account and regular savings account.
For example, you pay your car insurance bill every six months. Each paycheck you save a portion of your money into a separate savings account specifically for that bill. Instead of scrambling to pay a big annual or semi-annual bill, you save a portion of the money in advance regularly so you pay it out of savings when the bill comes due.
I started using this approach to save for the infrequent bills long before I heard about the idea of sinking funds.
3 Tips for setting up your sinking funds
Setting up sinking funds is relatively easy. You need to open a few extra savings accounts and figure out how much to set aside each paycheck. Here are a few quick tips to help you get started.
1. Choose the bank (or two) wisely
The three important things to look for when choosing a bank for sinking funds are:
- Allows multiple savings accounts
- Has a low or no minimum account balance amount
- Does not charge fees for low balances
With sinking funds, you’ll need to set up multiple accounts so you can “earmark” money for different purposes. And sometimes these accounts will have really low balances, such as $1. Many regular banks require minimum balances of hundreds of dollars or more to avoid account fees.
Also, try to find a bank that offers a free checking account with electronic bill payment. This way you can pay the bill from the bank directly instead of transferring the money to a different bank. This will speed up the whole process.
Two banks to consider when setting up your sinking fund accounts include:
- Capital One 360
Both of these banks allow you to set up multiple savings accounts for free, set up a checking account, and use electronic bill pay.
The bonus of using banks such as these is they pay a higher interest rate compared to your regular neighborhood bank. They’re typically referred to as high yield savings accounts.
2. Calculate how much to save each paycheck and stick to the plan
How much you need to save into each sinking fund account will depend on the amount of the bill and how many paychecks you have to save for it.
Let’s look at the example of a biannual car insurance payment of $500. Assuming you have 13 paychecks to save for it, $500 divided by 13 is $39.
Each paycheck you need to transfer $39 to your car insurance savings account to have enough money to cover the bill when it comes due. Thinking about this in terms of $39 per paycheck is manageable compared to scrambling to find $500 every six months. The other bonus is that you can save on monthly installment fees and interest by paying in full.
Double-check your calendar to make sure you’re counting the right number of paychecks you’ll receive before the next bill is due. In the future, you can change the amount you save once you have more time.
3. Setup the account nickname so you know which sinking fund it is
To help you easily figure out which account is which, use the nickname features provided by the bank to help to remember which account is for which purpose. Generic savings account names and numbers are going to make it easy to use the wrong account.
I also started adding my target savings amount into the account name so I can cross-reference my goal with the sinking fund purpose. This also helps keep you on track.
7 sinking fund ideas
Any infrequent bill or expense is a good option for saving a piece at a time into a sinking fund account. To help you with ideas, here are 7 sinking fund ideas to get you started:
- Property taxes (if you don’t escrow)
- Homeowner’s insurance
- Car insurance
- IRA (pre-saving the annual contribution)
For the moment I focus on the first four sinking fund ideas to keep on track paying my bills. And I have a separate account to save money each paycheck for the mortgage payment. Having extra sinking funds for additional spending needs does help you from increasing your debt when those expenses come up.
For monthly bills, I do something similar to sinking funds but use the half payment budget method.
How to track what you need to save into each sinking fund account
You should find the method that works best for you to track your sinking funds savings. Here are a few ideas that work for me.
Set up a recurring reminder for each payday with the amount of money I need to save.
Setting up a recurring reminder helps you follow the “pay yourself first” philosophy.
Each payday I receive an email from Remember The Milk with my savings “tasks”: the amount of money I need to save into each account. To keep it low maintenance, I check off each “task” after I complete the transfer. The system automatically creates the same task for my next paycheck.
Setup a bullet journal spread with a list of the savings tasks and a tracker to make sure you do them
When I started bullet journaling, I set up a spread so I could track how I was doing with each of my savings goals. The downside with this method is you need to remember to check the list every payday compared to a reminder that pops up to remind you. You could set up a reminder to “pay yourself first” each payday while using your bullet journal to track the actual tasks.
Over to you. Are you going to try using sinking funds to pay for bills? Or are you already pre-saving for your bills?
One of the first things I do each payday is “pay myself first” and transfer money into my separate sinking fund accounts. Over the years of doing this, I reduced my stress about having the money to pay my larger bills when they come due.
The other bonus of using savings funds is that you earn a little more interest in each account. While it’s probably pennies or a few dollars, all of that adds up over time. You’ll also save money when you pay a bill in full instead of paying installment fees or interest. Overall, a win-win in your favor.
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