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Financial stress can lead to strain, so it’s important to do whatever's possible to reduce this stress while planning for the future.
Sinking funds are a strategy many consumers find helpful, which involves creating a savings fund for expected future expenses, like car repairs, tech upgrades, or medical bills. When the bills are covered, people can spend less time stressing about money and more time putting it to good use.
Keep reading to learn how sinking funds can help achieve financial goals, fit into current budgets, and improve finances.
A sinking fund is a savings account that individuals set aside for a specific purpose or expense. For example, if someone sets aside $50 from each paycheck for their health insurance deductible, that would be a sinking fund.
When someone allocates a portion of their income to a sinking fund, they may be better prepared when these expenses arise, preventing them from dipping into their emergency savings or incurring debt.
Many people work planned expenses into their budgets but don't always know when they'll hit that bank account. A sinking fund can alleviate the stress of everyday expenses, like when a beloved pet's expensive medication is ready at the pharmacy.
Sinking fund categories help individuals stay in better control of their finances, regardless of times when money seems tight. Whether users open separate accounts for different uses or keep everything in one place, these funds provide much-needed security.
Here are some common sinking fund examples:
While a sinking fund is for planned expenses, an emergency fund is for unplanned expenses. The main difference is that a sinking fund is set aside for a specific purpose, like a fancy night out, while an emergency fund is for use in unexpected situations, such as job loss or a health emergency.
Sinking funds refer to the actual saved funds, while a savings account is one way to set aside funds for any purpose. Essentially, a sinking fund is a strategy to ensure there's money set aside to cover regular expenses, while a savings account is a banking tool that allows users to reserve funds separately from other accounts.
A person may have several savings accounts, each designated as a specific sinking fund. For example, they might have one sinking fund for a honeymoon and another for vehicle expenses, like insurance and maintenance. Some accounts provide other benefits, such as earning interest in a high-yield savings account.
Whether putting money away for a vacation, home repairs, or a major purchase, sinking funds and savings accounts can help individuals track their progress and meet their goals.
Sinking fund
Emergency fund
Savings account
Sinking funds can be an effective strategy for tracking monthly savings and meeting long-term financial goals. They provide peace of mind to know that necessities are covered with less financial stress, but this strategy may not work for everyone.
Sinking fund pros
Sinking fund cons
Creating a sinking fund is as simple as knowing how to open a savings account and predicting future expenses. Follow these basic steps to create thoughtful and practical sinking funds for a smarter approach to managing money.
Think about your financial priorities: If your goal is to reduce debt, set up a sinking fund towards any loan payments. If you have some room for fun, a vacation fund might be a financial goal suited for a sinking fund.
Keeping cash in a safe or debit account can be safer than stashing it in an old mattress, but it doesn't allow your money to grow. Savings accounts are a safe place to put your savings and even earn interest on your sinking fund.
Saving for the future can require a delicate balance. Soft saving is a financial strategy that prioritizes short-term financial goals to promote mental health and focus on the present—without draining your bank account.
Take a look at your budget and decide whether you'd like to take an aggressive savings approach or make smaller contributions to reach your goals. The latter choice might be better if you enjoy your creature comforts, like dinners with friends or lively exercise classes.
The last step is to add the sinking fund to your budget calendar. To reduce the temptation of skipping contributions, users can set up auto-transfers and group them on autopay with necessities like bills.
There can be a learning curve to budgeting and saving money, so use digital banking tools that help you track your goals. Tools like PayPal Savings can help you auto-save for individual goals, link multiple bank accounts, and give overviews of financial health.
Getting started with sinking funds is a significant step toward achieving financial control and reducing financial stress. Create a dedicated savings plan to transform vague financial hopes into concrete, achievable goals.
Ultimately, a sinking fund is the difference between scrambling to make ends meet and having better financial security.
When expenses become planned events rather than stressful surprises, you gain both financial clarity and peace of mind. See how PayPal Savings helps you regain control of your financial future.
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