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What Are Sinking Funds, And Should I Have Them? - YouTube

Channel: You Need A Budget (YNAB)

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allow me to act out a common scenario of

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the human experience

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seven hundred dollars

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what in the

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hi internet i'm hannah and i just

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realized i have no idea what your name

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is sorry today i want to dissect a very

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popular term in the financial world a

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hugely impactful and healthy financial

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practice with a not so self-explanatory

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name if you ask me sinking funds to

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define it a sinking fund is a fund you

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slowly build up over time for an

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inevitable expense think expenses like

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bet bills car repairs that once a year

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subscription or insurance payment any

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expense you know will eventually come

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but you might not know when or how much

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it will cost or maybe it's just a ways

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down the road and not an expense that's

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typically on our daily radar to start a

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sinking fund all we do is set aside a

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fixed amount of money each month to

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prepare for these expenses classic

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example i know the car will eventually

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need repairs we all know that and even

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though it always feels like a total

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surprise when it happens

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what

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these tires aren't eternal and that was

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when i realized the emergency brake was

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still on yeah i've just been driving in

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neutral to work every day

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only problem is you can't get back these

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surprises are actually a known expense

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of course i don't know how much it will

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cost when i do finally take my car into

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the shop and there's no way to know what

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day my car is going to ram into that

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fateful pothole but

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i know my car is a 2004 buick century

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and it's 20 21.

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even if you're driving a 20 20 jeep

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wrangler the girl's gonna need a little

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help here and there to not be saving for

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eventual car repairs is risky but the

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honest reality of it is we never think

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to save for these expenses

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until they've already happened or think

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about earlier when i found that 700

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insurance premium in the mail obviously

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i know our insurance premium is due

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annually i signed up for it i even knew

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how much it was going to cost but an

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insurance premium isn't something i just

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sit around thinking about very often

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it's a little out of sight out of mind

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until we get met with that rude

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awakening at the mailbox

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so now that this is all starting to

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sound really wise and appealing right

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how do you actually start a sinking fund

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like how much money do i want for one

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what's my goal here well let's hop back

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to that car repair example we talked

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briefly about earlier let's say between

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our two cars one of them commuting an

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hour and a half daily my husband and i

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figure we spent about fifteen hundred

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dollars on car repairs last year big oof

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so painful as it may be let's just

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assume to expect the same this year if i

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break up the fifteen hundred dollars we

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spent on car repairs last year by the 12

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months of this year it looks like i

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should be socking away 125

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a month into a car repair savings

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account or envelope or however you

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choose to set aside money for your car

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repair sinking fund and to not be caught

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off guard by that insurance premium next

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year it looks like i'll be wanting to

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set aside 58 59 a month to have the full

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700 by the time the premium comes in the

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mail next year now i said earlier that

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sinking funds were hugely impactful and

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important to our financial well-being

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because if we're being transparent here

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what happens when you do get that 700

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premium in the mail

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well

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uh if you don't just have a bunch of

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disposable income laying around and you

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haven't been building a sinking fund for

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it all year round

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then kind of my go-to option is just

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pull up the credit card and pay it off

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that way

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but yikes now i just walked into 700 of

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debt in one trip to the mailbox

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like wow

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that's why i like to think of sinking

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funds as debt prevention the more money

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i can put toward those kind of sneaky

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but still known expenses throughout the

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year the lower my chances are of needing

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to reach for the credit card or take out

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a loan instead of borrowing money in the

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future it's kind of like you're paying

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mini installments on each of those

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eventual expenses now the bill arrives

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and because you've been setting aside

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money for it all year long you have all

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the money you need right there ready to

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pay for it bada bing bada it doesn't

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quite feel like the end of the world to

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set aside 25 every month into a sinking

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fund for the vet but it could really

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ruin your financial groove to get a 325

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vet bill out of the blue when bingo eats

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your air pods because here's another

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thing even if you don't have that whole

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325 dollars set aside for eventual bingo

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mishaps imagine the difference between

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having 175 save depth for bingo in your

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vet fund

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and having xero saved up for bingo you

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are going to have a major leg up on that

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situation with your sinking fund

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than if you had nothing saved at all so

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now that we're all convinced sinking

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funds are the best idea since sliced

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bread let's talk about some methods for

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actually tracking and building them i

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know lots of you out there are cash

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envelopes kind of people and in this

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case you'll just start a different

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envelope for each of the different

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syncing funds you want to build so start

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one for school supplies one for summer

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camp one for a new laptop or your costco

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membership and just tuck away a logical

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amount of money every month into each

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envelope for that expense some are easy

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to calculate like dividing your 700

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insurance premium by the 12 months of

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the year

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and others you kind of just have to use

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your gut or intuition on it decide what

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you think the most doable but secure

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amount is like 25 every month toward the

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vet fund or 150 every month toward your

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new car now be careful because having

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giant wads of cash sitting in paper

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envelopes around your house may not feel

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the most secure make sure you have a

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safe and dedicated spot for them ideally

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with lots of locks and

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no liquids

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another popular method people use to

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save up for syncing funds is with

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multiple savings accounts maybe it's

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time you create a sub savings account

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for car repairs another for kids medical

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bills and another for a new water heater

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because seven into both you and your

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morning showers that yours is on the

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fritz maybe if you're gonna start a

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savings account for some of your larger

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sinking funds like a down payment for a

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house or a new car you could consider

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building those into a high yield savings

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account or a money market fund to take

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advantage of higher interest rates this

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can get a touch overwhelming if you have

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24 different savings accounts some at

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your regular bank and some in the high

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yield savings accounts somewhere else in

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the digital unisphere but it's a good

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way to see how you're tracking on your

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sinking funds and help keep them away

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from your debit card and your atm if you

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know what i mean what i don't spend

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money i shouldn't and if you're looking

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to just get started with syncing funds

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or maybe you want to switch away from

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the method you're currently using

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syncing funds are made super easy with

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the you need a budget app the beauty of

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the ynab system is that all of these

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accounts can be easily managed right in

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your budget it gives you an all-in-one

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view that feels a whole lot simpler to

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navigate than having multiple savings

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accounts or envelopes to keep track of

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when you're setting up a syncing fund

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you just create a new category for

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whatever sinking fund you want to start

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i'm going to do car repairs and then you

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just sync or set money aside into it

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every month and watch the balance rise

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you can of course just do this manually

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by adding however much money you want to

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individual categories every month or you

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can take advantage of ynab's target

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feature if you tap any of your syncing

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funds categories then tap details and

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tap create a target

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if you know how much money the expense

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will be for like my annual 700 insurance

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premium tap the savings balance target

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type and here you can tell the app how

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much you want to set aside and you can

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even tell the app when you'll need the

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money by when you add the date the app

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will calculate exactly how much money

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you need to put into your syncing fund

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each month to reach your goal by this

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specific date and don't worry if you

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ever put in more money one month or less

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money than it's telling you to the app

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will recalculate how much money you need

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to put in in the next month in order to

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still hit that target by the time you

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want that's the savings balance target

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type then of course there's always the

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instance where you don't know how much

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you'll need or when you'll need it by

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but you definitely want to have it like

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the car repair syncing fund or the vet

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syncing fund for these the monthly

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savings builder target type is your best

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choice because you will tell the app how

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much you want to put into this category

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every single month and it will expect

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you to do so until you decide to disable

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the target it is a great way to

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endlessly save regardless of when those

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expenses may or may not happen

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using the you need a budget app for your

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syncing funds is a great way to

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eliminate the millions of savings

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accounts you had for your syncing funds

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because you can separate them all out

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into their own categories in your budget

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and since you'll also create other

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categories in your budget for all your

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usual day-to-day expenses like groceries

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and mortgage payments and gas for the

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car you won't be accidentally spending

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any of your sinking fund money unless

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you actively choose to and after a while

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of building and nurturing your sinking

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funds i think you'll find that all of

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those emergencies that used to knock you

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off your financial feet aren't that much

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