54. Sinking Funds 101

In this episode, Laura Sexton kicks off the new year with sinking funds—monthly contributions to prepare for expected expenses like Christmas or car repairs. She clarifies the distinction between sinking funds and emergency funds, stressing the importance of financial planning for both current and future needs. The episode concludes with practical advice on implementing sinking funds, including deciding which funds to have, where to store them, and incorporating them into a budget for long-term financial well-being.

In this episode we’ll learn:

.   The definition and purpose of sinking funds

.   Examples and benefits of sinking funds

.   Effective implementation of sinking funds

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Transcript

Laura: 0:02

Hello and welcome to the Accelerate Your Legacy podcast. I'm Laura Sexton, your trusted financial coach and money mindset specialist. Join me as we explore the world of money and money mindset while also paving the way for a lasting legacy that extends far beyond money. Together we'll eliminate stress, amplify freedom, and ensure you stop paying for your past so you can start saving for your future. If you're seeking peace in your finances, more margin in your budget, and a legacy that inspires generations to come, you're in the right place. Happy New Year, Accelerators. I'm so excited to be here with you in this lovely 2024. It has been a crazy holiday season. I am ready to get back in the swing of things. And if you have set a goal for yourself to be better with your money in 2024, This is the place to be, so I'm going to ask you, have you written down your goals for 2024? Do you know what your goals are? Have you taken the time to sit down and really flesh them out? And if it is ambiguous, like, get out of debt, I would like for you to make it more specific, by when? I want you to make it measurable. I want to get out of 10, 000 of debt. Know exactly what it is that you're doing, and also you need to write it down. Writing down your goals will increase your chances of getting them done by around 65%. I don't know about you, but a 65 percent increase. Yes, please. Let me be a part of that. If you would like to know better ways to make your financial goals more specific, measurable, And attainable, I need you to jump on over to my website and get on the email list because this whole month I am talking about the ways to make your goals smarter and to make sure that you achieve them in 2024. That's only an email. I'm not going to be talking about it here on the podcast until maybe 2025. So if you're looking for that information, you can either jump on my email list over on my website at accelerateyourlegacy. com, or send me a message on Instagram, again, at accelerateyourlegacy, or send me an email, laura at accelerateyourlegacy. com, and I will get you The beginning, the first two letters, we covered the S and the M in Smarter Goals, making them specific and measurable this week. And I have extra little tidbits for you, so I look forward to hearing from you and making sure that you are on that email list so your goals can be smarter in 2024. There was one category of finances that I think we have failed to make specific here on the podcast, and that is sinking funds. I have had a lot of people recently reach out and ask me, they're like, okay, I hear you talk about sinking funds, but I don't really understand them. Can you please explain them? And yes, my friend, I would love to do that for you. So today on the podcast, we are going to dive into all things sinking funds. So what are they? It's a very good first question. Okay, what are sinking funds? Sinking funds are a way for you to set money aside throughout the year for some of the bigger ticket expenses. Sinking funds are sinking money into an account to hold over for later. How do they work? Well, every month you put a little bit of money aside so that You can have a larger lump sum when you need it. Think about it this way. Christmas comes in December every year. So, yes, we just finished the Christmas season. I'm already going to tell you to start a Christmas sinking fund. That means in January, you need to put money aside for Christmas 2024. By doing this ahead of time, doing little bits and little bits and little bits throughout the year, You were able to have a bigger Christmas. You were able to have a more robust Christmas. And if you're anything like me, you end up with extra money leftover in your Christmas budget that you can put on something else or to buy yourself a present. Why would we use a sinking fund? Well, to be completely honest, the Christmas fund is the first sinking fund I'd ever heard of. My mother had a Christmas fund set up at her bank where the bank would hold money in an account that she was not able to touch until November. This is really smart because they were having people save money for something specific, and it was going towards future spending. And we all love future spending. So we use these funds to make sure that things that we know are going to come up aren't going to kick us in the rear end. We want to make sure that if our car is going to need new tires, and let me go ahead and tell you your car is eventually going to need new tires, you start setting money aside. So that they can be covered, you want to make sure that you put little bits aside every month so that you're not coming up in the middle of June. You have all these things that you're planning for the summer, but oops, sorry, tire blue. And now you have to use all of your extra money instead of spending on something fun. You're spending on tires and you could have already taken care of that. The reason that we set up sinking funds is to make life easier. Easier. Do I really want to have sinking funds? Isn't it taking away from my monthly cash flow? Maybe, or you can look at it as future planning because if you have a situation, like, I do where you have the ability to set aside a certain amount of money every month for birthdays. But if I come to November, when my son and I both have a birthday, only one of us is going to get that allotted amount. But instead, if I set aside a certain amount every month for birthdays, that money is just accumulating into an account and part of it can be pulled out for each individual birthday. So when I get to November, I'm not completely overwhelmed and having to struggle to make sure that that birthday is paid for. Quick discernment here, a sinking fund. And a savings account are different things. The savings account is where you're sinking fund goes. You keep your sinking fund in a savings account. I keep mine all in 1 savings account. There are different savings accounts online, different online banking options will allow you to have multiple savings accounts so that, you know, which bucket the money goes in. I just have all of mine in the 1 savings account that is connected to my bank and I put that all in there and then I write it down on a piece of paper. What is in there for what? That is not a sophisticated, special, super fancy model, but it works and it works really, really well. And I never come up and go, Oh my goodness, I have all this money in this account. Is any of this for tires? Is any of this for Christmas? Is any of this for birthdays? What am I going to do? No, I know exactly what the money in that account is for. I have certain money or certain accounts set aside every month. Let's talk about what a sinking fund is not. Very quickly. Your sinking fund is not your emergency fund. An emergency fund is for unexpected expenses. Things that you are not expecting to happen. Your kid chips a tooth, you get a flat tire and you have to get a new one. Your hot water heater goes out. Things are going to come up that are completely unexpected expenses. That's an actual emergency and that is what your emergency fund is used for. A sinking fund is a totally different thing. Okay, sinking fund is for things that are expected expenses like Christmas. You know Christmas is coming on December 25th of every single year. You also know that you're going to need some of these larger ticket items and you don't want to have the guilt, the frustration of deciding what to do with this money. You don't want to get to 1 of these purchases. Like, we have to get a new roof for our house and now we're having to decide. Do we have that money set aside to buy a new car? Or do we use it for a new roof? No. I have a. Buying a new car fund, and I have a replacing the roof fund because I know both of those inevitably are things that I'm going to have to do. And so I'm setting a little bit aside month after month after month to make sure that I can make these purchases without shame, without guilt, without frustration. I'm taking those emotions off the table. If I want to plan for some big, amazing adventure, I start putting money in a sinking fund. A few years ago, we went to Hawaii and it was incredibly fun and we were able to build up this large travel fund. And then when when it was time to go on the trip, we had the money set aside in an account for Hawaii. It wasn't for Hawaii and for car repair and for no, it was just for our Hawaii trip. We were able to spend all of that money without having to worry about. Well, if we bring any of it home, it could go towards the new refund or it could go towards the new car fund. No. That was earmarked just for Hawaii and we got to spend it in Hawaii without worry, without stress, without guilt, without shame. That is the whole point of setting your money up for success. Sinking funds are also really great for variable expenses or expenses that come up once a year. If you have to pay for your car insurance, you pay it once a year, set aside a little bit every month. So you get it once a year, or if you pay it twice a year, set it up every month. So a little bit comes out. You may be thinking, Laura, I don't have it set up every month because I don't want to have to save for it every month. No, you have it set up for every 6 months because you get a discount. If you set a little bit aside every month, by the time you get to that 6th month. For more information, visit www. FEMA. gov You'll have that full amount that you can pay and you get the savings, you get the best of both worlds. Hey, accelerators, would you mind doing me a little favor? Could you take five seconds, pop on over to your podcast player and leave me a five star review? Then if you have an extra 25 seconds, would you write a little something to let other people know that this is the place to be to grow your wealth and increase your legacy? I would really appreciate the help boosting the ratings this year. By doing this, you're really making a difference. Now that you know what a sinking fund is, you need to decide what types of things you're going to be saving for. What kind of sinking funds are you going to have? I'm going to go through a list of a few and let me know if any of these resonate with you. These are just some examples. Car repairs. Car insurance. New tires. Home or renter's insurance. Home maintenance. New furniture. School supplies for your kids. Vet bills. Christmas gifts. Wedding gifts. Wedding expenses, if you're paying for your own wedding. Plane tickets, travel, set up a travel fund, okay. Um, birthday parties. School supplies. Clothes for special occasions like prom- if you have kids that are going to prom, set up a sinking fund for them. Home remodels. Concert tickets. Hello, NSYNC. Are you coming? Because as soon as NSYNC says our tickets are out, I have my syncing fund already set up. I have money set aside. As soon as they say their reunion tour is on, I'm paying for that right away. Okay, so you have come up with some of the accounts that you want to save for. Then decide where you're going to put it. I like to store mine, like I said, in a savings account, and I just write down on the legal pad what it is. How much money is set aside for each category. If that is not fancy enough for you, you can use something like the app every dollar. They have separate saving designations on the platform where you can say, this is my sinking fund. This is how much I'd like to have in that. And every month, you can put a little bit in there. That's the other thing you need to decide, right? You need to decide how much you need to save. Your sinking fund is not an indefinite throw money into. If I get to the end of the year, and we've had Christmas, and I still have a thousand dollars in my Christmas fund, which we don't even save it. Don't I don't have a thousand dollars extra, but go with me on this example here. If I get to the end of the year, and I have a thousand dollars left in my Christmas fund. I don't need to keep adding to it because I decided a thousand dollars was enough. Or if I know that we need to buy a new car. And I know that I'm looking at a 15, 000 dollar car. Once I get to 15, 000 dollars, I don't have to keep adding to that fund. And the last thing you want to do when you come up with all of the things that you need for a sinking fund, you want to make sure that you're putting it into your budget and your budget should start with your income at the top. All of your expenses, your dollars at the bottom of that fund. Make sure that all of your money has to be allocated within your budget. So look, if you have 50 per month set aside for car repairs, that's 600 at the end of the year. 100 a month for vacation. That's 1200 at the end of the year. 300 a month for a backyard makeover. 3600 dollars at the year. For this unexpected expected purchases, you know, these things are coming up, you know, that you're going to have to deal with them, but maybe your budget can't deal with throwing in an extra 3600 dollars a month for a backyard makeover. So, if you get, if you are planning to do a makeover to your backyard in June. And, you know, it's going to cost you 3600 dollars. You need to back that out and go. How much do I have to save every month between now and June to have that? Because you get to June and it's 3600 dollars. You either pay it. Because you have that extra cash flow, which if you do good for you. And if you don't. Your only other option is to pause and not do the backyard makeover, or to put it on a credit card, and we are not doing that, my friends, we are not creating sleepless nights, stress, aggravation, because we wanted a backyard where we could go and relax. That doesn't make any sense. So what we are doing is we are allowing ourselves to set ourselves up for success so that we can have a calm, cool, collected future moving forward. I hope that you heard something on this today that is going to inspire you to set your budget up in a way that not only plans for what you're spending this month, but takes into account things that you're wanting to do in the future of this year. So if something's coming up like a backyard makeover, or if you know you're having a baby in a few months, let's set some money aside for labor and delivery. I think this is one of those things that we kind of often overlook, and I just wanted to give it a little bit of extra shout out at the beginning of the year. I think it's really important that we fix our eyes, not just on getting through the month of January, but that we focus on our future and what's going to make our lives easiest in the days to come. All right, my friends, thank you so much for being here with me at the beginning of this wonderful 2024. If you are looking to win with money this year. And you need a little bit of help, reach out to me, let's set up a free clarity call me and you 1 on 1, and we are going to set you up with a game plan to win this year. Have an absolutely lovely January go out and make a difference. Thank you for investing your time with us today on the Accelerate Your Legacy podcast. Remember, your legacy isn't just measured in dollars and cents, but in the tools, habits, mindset, and reputation you leave behind. Don't just listen to the show, but take action on what you've learned. Share this wisdom with a friend who can benefit and help us spread the word by rating and reviewing the podcast. For questions or encouragement, reach out to me on Instagram at Accelerate Your Legacy or explore the resources listed in the show notes. I will be back with you next week. Until then, build your legacy with intention.