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Where To Hold Sinking Funds

August 23rd, 2017 at 11:27 am

I'm sure there are others reading that haven't heard of sinking funds, or know how to set them up. Hopefully, some of us veteran savers can help share how they work! Since I brought up sinking funds yesterday, I thought I'd point out some options for tracking and holding those sinking funds until you need them.

I just remembered that the first time I heard about sinking funds in the personal finance world was from author Mary Hunt. She wrote a book called Cheapskate Monthly Makeover (now titled Debt Proof Living) where she described Freedom Accounts. I actually like that term a little better, as that is exactly what it gives you. Freedom from living paycheck to paycheck because you are planning ahead.

Sinking Funds or a Freedom account are a place to hold the money for the irregular expenses that are known. Christmas is a great example. We know when Christmas comes every year, there is not reason we can't set aside money ahead of time for those purchases. This is amounts to be proactive (saving), rather than reactive (often credit cards) with money.

As I mentioned yesterday we also save ahead for car insurance, vehicle registrations, renter's insurance. And I'm working on getting a bit more clear with saving for tuition, band expenses, vehicle maintenance, membership fees, cell phones and eye glasses.

Currently, all of our sinking funds are in our main checking account. Yep, no interest being earned there. The reason we are able to do this is that we track all the money we are saving in sinking funds in YNAB, You Need A Budget, an online budget tool. I'm not really tuned into the amount we have in our checking account as a whole, because I don't look there. I look at YNAB. And YNAB has it all categorized.

So you might notice I mention we are all done spending because the cash is gone. For me, this means the money I allocated to spending in YNAB is gone. Our checking account still has plenty of cash because the sinking fund money is sitting there.

Before we used YNAB I would hold our sinking funds in a separate checking account at our same bank. Each pay period I would transfer the money to that second account, for later use. This worked really well to keep me from spending that money without realizing it.

I've seen online many people use Capital One 360 checking and savings accounts for their sinking funds. Apparently their online saving account allows for making categories for the money being held there. I think Lucky Robin may use this??

I know other people actually save the cash in envelopes. For me this would not work, only because converting to cash to save and then back to pay for things would be inconvenient.

So those of you who are using sinking funds, where do you keep your money?

Here's a link to Mary Hunt's explanation of a Freedom Account and how to set one up. This is really crucial to getting in control of your finances. I'd say this is step two after getting an emergency fund set up!

6 Responses to “Where To Hold Sinking Funds”

  1. snafu Says:

    I transferred money for irregular expenses to a linked savings account for years until electronic banking became available to PC users. At that point it was practical to deposit sums to a Money Market account linked to both retirement and taxable investments. At one point there was a confluence of events that resulted in a large sum being held with such abysmal MM savings rate, I dumped the majority into a Dividend mutual fund and later into a Dividend ETF. It takes two business days and several computer transactions to convert one monthly sum needed back to chequing to cover sum needed in a given month. Since I've always paid CC balances by due date, I take advantage of the 'cash back' programs as an intermediate step to vendors. At the moment the sum is inordinately high as I sold my car and felt a pang of regret as the new owner drove away. If I miss the car, I'll buy another, meanwhile there is financial benefit. I enjoy the results, all but the day I pay the resultant increase to income tax.

  2. CB in the City Says:

    I keep mine in a savings account at the same bank where I have a checking account. It's easy to transfer when I need to. I don't get very much interest, though.

  3. Beawealthywarrior Says:

    I have one account at Capital One 360 that house all my sinking funds or what I call my Cash Flow Account. Like you I use YNAB to track everything seperately. I normally just take all known annual expenses and unknown and divide it by 12 and save that amount every month. In the beginning, it maybe shocking to see that monthly number, put it definitely brings financial peace knowing that funds are there whenever needed.

  4. Bluebird Says:

    I read Mary Hunt's book in the mid-90's, and I've used Freedom Accounts since. It was truly a life saver then, and second nature now!

  5. rob62521 Says:

    You are smart to have these accounts. We also have them. I talked to my financial advisor yesterday and were discussing the fact that so many of the people he has worked with over the years, once they retire, they will then say they want to take out a substantial amount to buy "their retirement dream car." He explains that although it is their money, that taking out that much after retirement will cut down on what they have and they don't get it. He suggests they set up a separate account at their bank and credit union and save up for the car and they think he's nuts. He isn't trying to sell them anything nor is he the type that doesn't want people to use their money. Whenever we have something come due like some CDs we have laddered, he always checks to see if we need the cash. But people don't just get the concept of saving for stuff.

  6. FrugalTexan75 Says:

    Mary Hunt and the "Freedom Account" idea is what started me back on the right financial path. Before YNAB, I used multiple savings accounts at ING to hold my various funds. Now 98% of the money is kept in two interest bearing checking accounts - accounted for in YNAB.

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