You’ve probably heard the phrase ‘sink or swim’ used in various contexts, but what does it mean when it comes to personal finance? The truth is that there are so many ways to save money – but most of these methods are short term. We hear a lot about ‘saving for a rainy day’ with an emergency fund, but what about all those expenses that we can see coming, that don’t necessarily fit into a monthly budget?
This can be anything from being invited to a destination wedding, to your bi-monthly hair appointments. You know, those expected but often unplanned for expenses.
Sinking Funds can help with that!
By referring to a ‘sinking’ fund we don’t want you to develop a sinking feeling – the term really refers to the reduction of debt you will experience by using these funds. It also means that you are at liberty to enjoy yourself without feeling guilty about tapping into your hard-earned long-term savings.
What is the difference between a sinking fund and an emergency fund?
To the untrained eye they are identical, but in reality, your emergency fund is really for just that – emergencies. Think things like major unexpected vehicle repairs, pet emergencies, or living expenses if you find yourself unemployed. A vacation or Christmas gifts certainly aren’t emergencies.
Your sinking funds, on the other hand, are for expected expenses. You can have multiple accounts for various expenses: That trip you have coming up, birthday celebrations, etc. By putting a little bit of money aside each month for these upcoming events, you’ll find that by the time the big day rolls around you’ll have the cash set aside for it, and won’t need to rely on credit cards (or that critical emergency fund).
What is the difference between a sinking fund and a regular savings account?
Your financial goals differ depending on your current and future needs. You may be saving up for an eventuality or a specific goal – for example, a new car, a down-payment on a house, or even retirement. These are long-term savings goals, and it’s smart to put your money into an account with high-interest, that you leave to collect interest on over a period of several years or more.
In contrast, your sinking fund is for a once-off expense, and your money should be saved in various High Yield Savings Accounts (one for each sinking fund, ideally) where you are able to earn interest but can access your money whenever you need it without penalties.
No matter what your financial situation or upcoming expenses, a financial advisor can help you figure out the best plan for your money. If you have questions, schedule an obligation-free consultation with Steven today.