At Christmas time, if you didn’t spend the previous 11 months of the year saving for the holiday, you might find yourself strapped for gift-giving cash. Previously, I shared how a sinking fund can help you financially prepare for recurring expenses throughout the year. If you read that article, you know what a sinking fund is.
But how do you use one and what makes if different from your other accounts?
Sinking fund vs. savings account
What’s the difference? A sinking fund is usually more specific than a savings account since you know how much you are going to put in there and when you will use it. A savings account could just be a place where you put money until you need it. Savings accounts could be used for the known, like retirement and home improvement/upgrades or the unknown, like emergencies and incidentals.
Where do you keep a sinking fund?
You want to have a sinking fund in a place where you can easily get to it. The bigger the amount, the more secure you want it. If you are saving $25 a month for four months so you can buy a birthday gift for someone, it’ll be okay to keep an envelope hidden somewhere in your home. Although, don’t be tempted to cheat and spend the money on late-night pizzas!
If you’re saving for a car, a simple savings account at the bank is probably a better idea. You can get to it easily and you don’t risk having a pile of cash lying around if someone breaks into your house. If you do this, make sure the account doesn’t have a minimum balance to maintain (such as a money market). You don’t want your money eaten away by fees.
With some patience and a plan, a lot of the cost and worry associated with big purchases can go away. You’ll prevent credit card interest rates and fees as well as reduce the stress that comes with larger purchases. Don’t let these expenses sneak up on you, plan and prepare for them.