Make A Change Monday: Set Up a Sinking Fund

photo © 2007 Todd Petit | more info (via: Wylio)

When I first started Family Friendly Frugality, I knew I wanted to approach frugal living from a very relaxed and welcoming mindset. I wanted to create a blog about frugal living that didn’t leave people  feeling overwhelmed or less than when they walked away.

The main complaint I hear about saving money nowadays is that it is too darn overwhelming to know where to begin. If you have $20,000 in credit card debt, is clipping a few coupons realistically going to make much of an impact to your bottom line? If you are drowning in student loans and house payments, is living within your means even possible?

The answer to all of the above is  yes. While the small things you do might not add up to financial freedom, they do make a big difference. Some of them will chip away at your debt or create more wiggle room in a tight budget. Some of them will simply give you more confidence and a self esteem boost, proving to yourself that you can save money!

So I am starting a Make a Change Monday series where I will simply give you one task to work on for the week. You might already be doing it…so you get to skip that week! If not though, try it out and see if it makes a difference! I’ll keep them small manageable changes that don’t require a lot of effort or learning the drugstore game .

This week’s Make A Change Task:

Set Up a Sinking Fund

Okay, first let’s define “sinking fund“.

Sinking Fund: A fund into which companies or governments place money to redeem their bonds and other forms of indebtedness. (source: Here)

The best way I personally know how to explain sinking funds is to use an example. Say you have a bill that comes due once a year (taxes, insurance, mortgage, etc), basically any debt that requires a large lump sum payment at one time. Common sense tells you that it’s wise to save up for that bill each month so that when that bill comes due, you aren’t scrambling for the cash.

A sinking fund is nothing more then an account you set up to gather monies for larger debts or purchases. You can set a sinking fund up to pay your car insurance every 6 months. It doesn’t have to be debt either. You can also set up a sinking fund to save up for vacations or boats or homes or even Christmas presents! This is not your general savings account. It’s money specifically designated to be spent for one purpose in the near future. This is an important distinction to make because a sinking fund in the personal finance world is actually more of a mental assurance and confidence booster then a strategic business move.

Let’s face it, we could lump all of our savings together in one giant savings account (giant?…okay we can hope, right?). Where’s the sense of accomplishment in that? Where is the visual reminder of our progress towards our goals? Setting up various sinking funds helps us keep our eyes on many prizes at one time and gives us a more realistic picture of where our finances currently stand.

So how can you set up sinking funds for yourself? We personally use Capital One 360 (formerly ING) for our sinking funds. Every week we transfer money from our checking account to various savings accounts in our ING account. Throughout the year we can see how we are making progress towards the specific savings goals we are working towards. If we have a payment that is due at the same time every year, and it is for $1,000, we would transfer ($1,000/52 weeks in a year=) $19.23 every single week so we could ensure when that bill came due, we’d have the cash on hand to easily pay it!

This week, either call your own bank or sign up for Capital One 360 and create a sinking fund! Work out a plan to funnel money towards that account each week or month and sit back and relax knowing that you no longer have to worry about those large purchases or lump sum payments, because thanks to your sinking fund…you’ve got it covered!
Previous Make a Change Monday Tasks.