The Number One Financial Tool You Need

Budgeting is hard for everyone. Seriously, it’s not just you. I’m a former Accountant, and we’ve been actively budgeting for a decade, and it’s still hard for me. So don’t for a second think that you’re just going to magically get it, and everything will be perfect. It won’t be. 

Any way. One of the hardest parts about budgeting is adjusting it as life happens. Because, well, life will happen fast and when we least expect it. Most of us have been told that we need to “save for a rainy day,” but we weren’t really told what that meant or how that actually played out in real life. Should I save $20 or $200 or $2,000 or $20,000 for this “rainy day”? And the reality is that the dollar amounts are totally dependent on you and your real life. No two “rainy day” funds are going to be alike. But more than that, a rainy day fund is oftentimes not enough to prevent the “oops” and “crap, I totally forgot about that!” expenses that will inevitably pop up. And that’s why you need this financial tool.

The Number One Financial Tool You Need:

Sinking Funds. If you aren’t familiar with Sinking Funds, they’re kind of like different “pots of money”. Think back to your great-grandparents where they’d hid money in the coffee tin or in prescription pill bottles. You’re essentially doing the same thing here, except with different bank accounts. For example, Christmas. There’s no reason to go into debt to pay for Christmas because you can save all year long in anticipation of Christmas happening every December 25th. So set up a Sinking Fund to save for Christmas by opening up a separate checking or savings account – your choice, but for this one, I personally prefer a checking account. That way, I can just spend the money directly from that account’s debit card for Christmas shopping. And then you save in that Sinking Fund until you’ve reached your “threshold” amount. That amount can be whatever you want it to be, or you can just set up a reoccurring automatic deposit to that account from your paychecks. Totally up to you.

Go Slow

Before we go any further, I must pause here and tell you the secret sauce to winning with Sinking Funds. Go slow. Please do not read this blog post and then jump into trying to fund 15 different Sinking Funds all at once. You will wear yourself out and stretch yourself too thin. So before you go any further, I want you to remember that you’re going to build these Sinking Funds up a little at a time. One will be the priority, and the others will take a backseat until the one that’s a priority is funded. Slow and steady win the race, my friends. 

How to Set Up Sinking Funds

Start by writing down all the Sinking Funds you’d like to create. A good place to start is to think of all the expenses that pop up that you should have been able to anticipate. Like a dead car battery. Christmas and vacations. Regular home maintenance, like getting your home pressure washed or the air ducts cleaned. An emergency vet visit. That type of thing. 

Then list them all out. Here are the ones that my family currently uses:

• Christmas
• Vacations
• Pet Stuff
• Kids & Homeschool
• Auto Maintenance
• Home Maintenance
• Healthcare (we pay for our regular healthcare expenses out of pocket because we don’t have traditional insurance. More on that here.)

Once you’ve listed them out, then think about what your “threshold” amount should be. This is the amount you want to be saved in that account. So, for example, let’s say we’re talking about the Vacation Sinking Fund. You decide that you want $2,000 in that account. What you’ll do is save up in just that sinking fund until you’ve reached that $2,000 goal. Then you’ll stop contributing to the Vacation Sinking Fund and move on to the next fund on your list. 

That’s not to say that you can’t contribute to two Sinking Funds at once, but I don’t recommend trying to aggressively build two at the same time. So you could aggressively build up the Vacation Sinking Fund while having an autodraft of $20 a paycheck to your Christmas Sinking Fund. You just have to make one the priority.

Why Sinking Funds Work

Sinking Funds work because they help keep expenses that pop up but aren’t necessarily emergencies nor unexpected from derailing your budget. If you were to go out and try to crank your car to drive to work tomorrow and the battery is dead. Instead of fretting over how you’ll pay for the $175 replacement out of an already tight budget, you’ll have the money ready to go inside your Auto Maintenance Sinking Fund. You’ll pay it and you’ll move on. End of story.

So if you’re struggling to make a budget work for your family consider setting up Sinking Funds to help offset expenses. 

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