Day 2: Set Up Sinking Funds
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Welcome to the 7-Day Financial Reset, a weeklong challenge designed to help you start the new year off strong. We’ll guide you through one practical money task each day, so you can build habits that make your finances work better for you.
If you notice certain expenses sneaking up on you each year, it might be time to consider sinking funds.
A sinking fund is just a dedicated savings account that you contribute to all year long for a specific purpose. That way, the money is there for you when you need it. It’s different from an emergency fund, which is designed to handle unexpected costs like emergency car or home repairs.
Popular sinking fund purposes include summer camp, holiday spending and vacations.
Here’s how to set up sinking funds for the year:
- Review your upcoming expenses. It might help to look back over the previous year’s spending to remind yourself of any big costs — especially ones that only come around once or twice a year. Any expenses that exceeded your budget or caused you to turn to debt in order to finance them could be good candidates for a sinking fund.
- Create a savings account — either within your existing financial institution or at a new one. The ideal spot for a sinking fund is a high-yield savings account that is easy to access and free of any minimums or fees.
- Start your contributions. Some sinking fund users like to set up automatic monthly transfers so the accounts slowly build throughout the year until you need them. You can also manually transfer money into the accounts after you receive extra payments like a tax refund or bonus.
When the expected expense comes up, you’ll be ready for it. And if you have extra money left in the sinking fund, that’s OK. You can simply use the money for a different purpose or keep it for next year.
Come back tomorrow for the next 7-Day Financial Reset challenge.
» Need to back up a bit? Day 1: Cancel subscriptions you don't need
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