When Justin and I first started out on our journey to better our finances, we really struggled with inconsistent expenses. Honestly, it took us over a year to figure out what they were, but those quarterly, biannually, and annual expenses really took a toll on the progress we’d hoped to make that first year.
How To Use a Savings Fund and Why You Absolutely Should
Then we found out about savings funds. As I’ve grown in my knowledge of the financial terminology, I know that what I refer to as a savings fund is more commonly referred to as a sinking fund. And yet, I still like the idea of saving better than sinking, so I’ve stuck with it.
What is a Savings Fund?
If you look up “sinking fund” in the dictionary, you’ll find a really complicated definition that will leave you confused and ready to give up entirely. Savings funds, though, are really not complicated. Ultimately, it’s a certain amount of money that you set aside each month (sometimes more frequently), in order to be able to pay for specific expenses as they come up throughout the year. It’s the act of planning ahead, so you aren’t caught off guard.
Let me use an example from our own budget.
We have a savings fund for pest control. We’ve hired a certain company to come out every quarter and spray for ants, spiders, and wasps. The total amount we pay each quarter is a little over $90, so each month, we put $30 into that fund so that when the bill comes due, we have the full $90 to pay and our budget for that month isn’t affected negatively.
Why Have a Savings Fund?
There are many reasons you might want to implement a savings fund (or many) into your budgeting routine, but there are a couple that stand out.
Leave the Emergency Fund Alone
Remember how hard it was to get that emergency fund to a level that you could be confident in? It wasn’t easy, right, and the last thing you want to do is touch that hard earned money for something that’s not truly an emergency situation.
When you have sinking funds in place for the things that come up consistently throughout the year, then you won’t be tempted to use that emergency fund for anything less than an emergency.
Personally, we’ve found this to be especially true with our medical and household savings funds.
Consistent Budget
You’ve probably heard the old adage, “Consistency is Key”, and I have to say that, when it comes to your budget, nothing could be more true. The more consistently you plan ahead for potential expenses that might arise and implement them into your monthly budget, the more likely you will be to succeed in the long term.
Not to mention, your budget will start to automate itself a bit, and you’ll no longer worry about whether you have enough money to make it through the month if something big happens!
One of my favorite funds in our budget is our household fund. We have a monthly allocation for household goods, like paper and cleaning products, but our household savings fund works a little differently. Each month we deposit a certain amount into it and that money adds up over time. It’s there to catch random expenses, such as light bulbs, a can of paint, plumbing necessities, and anything else household related. I cannot tell you how many times that household fund has saved our monthly budget. If we’d had to pull from our monthly budget to pay for a “not emergency, but necessary” plumbing situation, we would have been in dire straits.
But our consistent deposits to that fund made it easy to pay the plumber and get on with our lives.
Types of Funds to Implement
Of course, the types of funds you decide to incorporate into your own budget will likely vary from mine, but some of my favorites include:
- Licensing and Car Maintenance: Those pesky car fees come once per year, but it’s wise to put aside a little for them each and every month.
- Utilities: Have fluctuating utility expenses? Find the average and put that money aside each and every month so you aren’t caught off guard by that huge water bill in the summer or heating bill in the winter.
- Vacation: Planning an upcoming family trip? Decide how much you will need and then put aside a certain amount each and every month. Find a tool to help you HERE.
- Game Night/Generosity: Spend a lot of time with friends? Add a little money each month to a fund specifically for being generous with others when the opportunities present themselves.
- Home Improvement: As I said before, this fund has saved our budget many times.
- School Year Expenses/Back-To-School: Don’t let back-to-school supplies destroy your fall budget. Or, what about that Valentine’s Day party? Plan ahead by putting a little aside each month. You can find the tool I use HERE.
- Christmas/Holiday: I actually wrote an entire post on keeping a holiday budget. You can check it out HERE.
- Medical: We recently had several trips to the doctor that could have ruined our budget if we hadn’t planned ahead. Check out the story HERE and learn how you can plan ahead for your medical expenses as well!
- Pet Care: Pets aren’t cheap. If you don’t plan ahead, you can easily see your entire monthly budget plan go out the window in lieu of an emergency vet visit. Check out how to avoid that HERE.
Do any of those sound like something your budget might need? If so, make a note of them now.
Tip: Grab my FREE Savings Funds Worksheet Download to get you on the right track!
How Much to Add
Deciding you need a savings fund and determining how much you need are two very different things. Personally, I recommend starting with the expenses you know you can count on, such as licensing fees. If you know that it’s going to be the same or similar year after year, then just bank that amount.
When it comes to funds like household and medical expenses, I try to think in terms of the worst case scenario. Ideally, I’d like the fund to cover anything up to our deductible amount, although that’s not always possible. If it’s not possible for you either, start with an amount that you are comfortable with.
At the time we started our medical fund, I told myself I was going to put $50 per month in it until it reached a total of $300. That $50 fit comfortably into our monthly budget, and I knew that I could go above and beyond that $300 total if I wanted to, or at that point, could focus on something else.
Start where you are comfortable – you can always make adjustments in the future.
How to Track Them
The concept of tracking multiple savings funds can create anxiety for a lot of people, so, if you are feeling that way, know you aren’t alone. There are many simple ways you can track your savings funds.
Paper
There’s nothing like using the traditional method of paper and pencil to track your savings funds. Not only does it allow you to see exactly which funds are being used and when you start to run low on funds, but it also makes it easy to show your spouse or family what the progress looks like.
You can do this on any generic sheet of paper, but personally, I use the Blessed Budget Planner and it comes with monthly pages to do just that.
Cash
Using a cash envelope system? If so, it might be in your best interest to create cash envelopes for your more commonly used funds. In our case, we have cash envelopes for some of smaller funds, including game night and pet care. The larger funds, or those that we don’t use regularly, we’ve chosen to track on paper and simply leave the money in our bank account.
App
There are several apps that make it easy to track your budget and funds. EveryDollar, Mint, and YNAB (You Need a Budget) are all options I’ve tried and enjoyed using. Similar to the paper and pencil method, you’ll want to make sure you are tracking each and every “deposit” and “withdrawal” from your funds.
Separate Accounts
It probably won’t be cost or time-effective to have a separate account for each and every fund, but if you start to notice that one fund is growing to a significant size, like a vacation or emergency fund, it might be valuable to have a separate account for that money.
My suggestion: check around with local AND online banks and see if you can find a good interest rate on any new account you open.
Get Started Now
The longer you wait, the more likely it is that those expenses you could have prepared for ahead of time will find their way into your monthly budget and cause problems. Determine which funds you need and make a plan for them. Even if you can only contribute a small amount each month, you’ll thank yourself for it when that expense arises.
Which fund will you implement? Let me know in the comments below!
Tip: Need some help getting started with your budget? Check out this series.
