Blogmas Day 7: Sinking Fund

A sinking fund is a savings account set up to save money to pay for something in the future. It’s like the opposite of credit! Instead of buying now and paying later, (with interest,) you save for it now, EARN interest, and pay for it when you have all the cash! It does involve a little planning and discipline, but takes you far away from the land of impulse buying and devil-may-care attitude. This way, you stay on track with buying what you need WITHOUT going into more debt. In other words, you might call it saving up for something. Another word for “sinking fund” is actually just “savings.”

Thoughtful planning…

To set up a sinking fund, you’ll first have to think about what you’d like to save for. You can save up for fun stuff, like vacation or a new toy. I’ve got several sinking funds set up. Vacation is really important for me, so I set up a fund for it. I know I’ll be taking vacation either way, and it will be more enjoyable if I’ve saved for it!

Useful for independent contractors

On the practical side, I use a sinking fund to put aside money to pay my taxes. I am an independent contractor with a home health agency, and I have a private physical therapy practice. I am required to set aside self-employment tax and pay the IRS quarterly. An easy way to do this is to save 30% from every paycheck before I do anything else. I also take 10% from my paycheck and put it into my emergency fund. Another fund pays my biennial physical therapy license fee and malpractice insurance. Those two fees come out to $500 every two years for the license and about $200 once a year for the insurance. Without my savings, I find myself scrambling a bit when September rolls around, which is when these bills come due. To meet these costs, I save $50 a month and boom, no worries to pay those bills. I have one more fund set up for con-education courses, which can get pretty pricey since I don’t have the benefits that come with working full time.

Where you do keep your sinking fund?

I currently use Synchrony Bank, which currently provides a 1.30% interest rate, and allows me to set up as many different funds as I wish. I can name each fund for the purpose for which I use it, and can easily keep track. One thing to remember is that it takes a few days for the transfers to go through. If I’m moving money to my checking account, I have to be sure to schedule with enough time for the money to transfer before I need it.

Staying motivated!

It requires discipline to keep track of all the money coming in and going out, and more still to save for upcoming expenses. There is no adrenaline rush like making an indulgent impulse buy and putting it on the credit card. There are no unexpected big purchases made after taking a trip to the mall “just to window shop.” But there’s also nothing quite like the calm feeling of contentment that comes from paying for a vacation with cash, or effortlessly paying a big bill that you were expecting and actually have the money for! I found that having a sinking fund keeps me on track towards not making impulse buys. I know that each dollar bill I have has a job, and going off track will set me back. A sinking fund will definitely keep you motivated to keep track of your finances and prevent unplanned splurges that destroy your progress towards being debt-free.

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