SAN JOSE, California, January 4, 2022 / PRNewswire / – A budget can be a powerful tool in helping you manage your finances. When you plan your monthly recurring expenses and your variable expenses (like food, meals, and entertainment), you can make sure that you are spending your money on the things that matter most to you.
Yet even though you are used to using a budget every month, there may be something missing from your budgeting system. The start of a new year may be a great time to add that extra element: sinking funds. Find out how these small savings funds can offer a solution to help you better manage your spending in 2022, from myFICO.
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What is a sinking fund?
Some expenses don’t happen every month, but you still need a plan to pay for those costs. Otherwise, you might be tempted to turn to credit cards for financing or plunder your emergency fund when these expenses inevitably arise. This is the kind of situation where a sinking fund can help.
A sinking fund is a place where you can save money for a future planned expense. It is a type of savings account that has a specific purpose.
Once you’ve set your sinking fund goals, you can add them to your monthly budget. Typically, you’ll hand over a little bit of cash each month, depending on the amount of each expense and how much time you need to save for it.
What kinds of expenses can you prepare for with sinking funds?
You can create a sinking fund for any expense that you expect to encounter in the future. Below are some examples of inspiration.
- Holiday gifts
- Anniversary celebrations
- Insurance premiums
- Back to school Shopping
- Children’s activities (Summer camps, seasonal sports fees, etc.)
- Car maintenance (tires, oil change, tune-up, etc.)
- Down payment for a house
How to finance your sinking funds
Consider Christmas gifts for a closer look at how a sinking fund works. According to CNBC, the average American planned to spend around $ 1,000 on gifts for the holiday season 2021. If you wanted to save $ 1,000 cover vacation costs in 2022, by putting 84 $ per month in a sinking fund would help you achieve this.
For bigger goals, like putting money aside for a down payment on a house, you may want to look for ways to speed up the savings process. Maybe you will put aside $ 50 Where $ 100 per month, whatever your budget. But as you receive bonuses or tax refunds, you can also choose to make larger deposits into your sinking fund.
Trying to reduce your variable expenses can also help you save more quickly for a particular goal. Imagine your budget $ 600 per month for household shopping. If you have a month where you only spend $ 550, you could direct the remaining money into the sinking fund of your choice. Saving money in one area of your budget can set you up for future success in others.
Where can you keep your sinking funds?
Unlike long-term savings funds, like money you set aside for retirement or a child’s education, you may want to withdraw the money from a sinking fund as soon as possible. . Therefore, it might be useful to keep some sinking funds in a savings account that is easier to access for deposits and withdrawals.
A general savings account may not be the best place for your sinking funds either. Sinking funds exist for specific purposes. So you might want to keep them separate from your other money.
One option to consider is setting up multiple savings accounts. Several online banks offer this service and may give you the option to log into your main bank account so that you can make wire transfers. Some banks will even allow you to name each sinking fund, which can help you stay motivated and track your progress.
It should be noted that some people prefer to build sinking funds with money. If you choose this approach, however, be sure to exercise caution. It is important to keep your money in a safe place. You should also take into account that saving cash will make you forfeit any interest your money might earn by staying in a bank account.
Are sinking funds right for your budget?
Sinking funds can help you plan for major expenses while keeping control of your money. Since saving money is rarely a bad financial decision, sinking funds can fit almost any budget.
It’s of course important to make sure you stay on track with all of your financial goals when you start adding money to your sinking funds each month. Saving money for a vacation or vacation can be exciting. Just make sure you don’t give up on other important projects like building an emergency fund, paying down debt, or investing in the process.
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