Big expenses that don’t occur very often can be budget busters. You know you’ll need to buy things like new tires for your car every few years, or you have insurance bills that you pay once or twice a year, plus there’s all the birthday and holiday gifts you buy throughout the year. But because these expenses may not be every month, when the time comes, you may find yourself struggling to find the extra funds in your monthly budget.
While it’s very easy to buy now and pay later using credit cards or payment plans, making it a pattern can lead down a path to debt with expensive finance charges.
That’s where having sinking funds can come in handy. CNBC Select how this method of savings can help you be prepared for infrequent expenses.
You Need a Budget (YNAB)
-
Cost
34-day free trial then $99 per year or $14.99 per month (students who provide proof of enrollment get 12 months free)
-
Standout features
Instead of using traditional budgeting buckets, users allocate every dollar they earn to something (known as the “zero-based budgeting system” where no dollar is unaccounted for). Every dollar is assigned a “job,” whether it’s to go toward bills, savings, investments, etc.
-
Categorizes your expenses
-
Links to accounts
Yes, bank and credit cards
-
Availability
Offered in both the App Store (for iOS) and on Google Play (for Android)
-
Security features
Encrypted data, accredited data centers, third-party audits and more
PocketGuard
-
Cost
Free basic budgeting app; $34.99 per year to upgrade to the premium version, PocketGuard Plus
-
Standout features
Taking into account your estimated income, upcoming expenses and savings goals, “In My Pocket” feature uses an algorithm to show how much you have available for everyday spending
-
Categorizes your expenses
Yes, but users can modify
-
Links to accounts
Yes, bank and credit cards
-
Availability
Offered in both the App Store (for iOS) and on Google Play (for Android)
-
Security features
Major bank-level encryption, PIN codes and biometrics like Touch ID and Face ID
The amounts you save in your sinking funds can be small or large – it’s really up to you. Plan to spend $600 on holiday gifts next year? Then you’ll add $50 per month to a sinking fund. Want to set aside 1% of your home’s value for maintenance and repairs? On a house valued at $400,000, that’s $4,000 a year or $333 per month. You may not spend that much every year, but it’ll likely balance out in the run as some years you may have more expensive home tasks, like replacing your HVAC system.
If one sinking fund has a shortfall for an expense, you can always withdraw from another sinking fund to avoid going into debt. For example, if you need $500 for car repairs and your car repair fund only has $300 in it, but you’ve got the extra $200 in your house down payment fund, then by all means, use it. But if you find your sinking funds are consistently coming up short, then reassess and adjust how much you set aside each month.
You can create a sinking fund for any financial goal or expense you have. These can be ongoing expenses that occur irregularly, like car insurance that you pay every six months or once a year, or a big one-time expense, like a wedding. Predictable expenses that you pay monthly, like your utilities, should remain part of your monthly budget.
Some examples of sinking funds could include:
Your sinking funds can change over time as you accomplish your savings goals and make the large purchases you planned.
While they may seem similar, there are differences between sinking funds and emergency funds.
An emergency fund is for unexpected expenses, like job loss and medical emergencies. While some home and car repairs can be considered emergencies, if you save for those things in a sinking fund, you’re less likely to have to tap into your emergency fund for them.
Your sinking funds are something you set aside in addition to your emergency fund. If you do not have an emergency fund, it may be useful to get one established as well.
You want your sinking funds to be accessible, but not too easy to get. Keeping all of your extra money in your main checking account that’s tied to a debit card may not be a good idea, especially if you’re prone to overspending or impulse buying.
Keeping your sinking funds in an investment account typically is not a good idea either because investments should be funds you don’t plan to withdraw for many years. The value of investments fluctuates frequently, and you could subject yourself to a loss if…