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Berna Anat.
Bernadette Anat
After paying off $50,000 in debt, Berna Anat started saving money seeking financial freedom. She found that a “sinking fund” can help with typical life expenses that don’t require cracking open the emergency fund.Being prepared for life when it happens is true financial freedom.
An emergency fund is a necessary part of anyone’s financial plan. If you experience a job loss or long-term illness, you’ll have funds to cover expenses until you can get back on your feet.
But what if there isn’t an emergency? If you find yourself constantly dipping into your emergency savings for everyday issues, you will soon not have much of an emergency fund left.
That’s where a sinking fund comes in.
A sinking fund is “basically when you save money in any account, usually a little at a time, for different things you know you will spend money on in the future,” writes Berna Anat, author of “Money Out Loud: All the Financial Stuff No One Taught Us.” They’re most useful after you have your emergency fund saved — the everyday items or fun stuff is much easier to save for when you know the serious stuff is taken care of.
Anat found herself in $42,000 of student loan debt and added another $12,000 in credit card debt after moving to New York. She writes that she taught herself how to pay off the debt and that “budgeting and saving unlocked all of the best parts of life and helped her to grow financially.”
You can use a sinking fund however you want
“A sinking fund covers expenses that pop up every now and then, but not often enough to get their own line item in your monthly budget, and they aren’t urgent enough to crack open your emergency savings,” Anat writes.
A sinking fund would have come in handy when I had to replace the windows on my house instead of putting that expense on my credit card.
I now have my own sinking funds for various items, like house stuff, holiday spending, and entertainment. Some of you might remember that your parents had a “Christmas Club” through their local bank or credit union. That was the original sinking fund. My mother had a Christmas Club and would deposit money in that savings account every month or every two weeks and have all of the money she needed for her Christmas shopping.
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“You could include sinking funds in your monthly budgeting and when you receive your income, you can sprinkle money into each of your sinking funds according to what you need most,” Anat writes.
You can have as many sinking funds as you like, however big or small you need. Some banks, like Ally, offer the ability to store money in labeled “buckets” so you don’t mix up which money is intended for what, but you can also open multiple savings accounts at your bank or at multiple banks.
“Then, when these random-but-typical things come up, for example, your car’s brake light gets cracked, or the air conditioning unit needs a new filter, you are prepared,” Anat continues. “No need to dip into your emergency savings or cut any part of your budget. That’s what your sinking fund is for.”