If you’re not familiar with sinking funds, it’s time to listen in!
According to recent polls, Americans save only 3.8% of their paycheck each month. Based off this information, many people have never experienced the magic of a sinking fund! This is one of the strategic tools I personally use when budgeting.. and I think you should too. Here’s why:
A budget provides you with permission to spend, while a sinking funds give you encouragement to spend.
What Exactly Is A Sinking Fund?
A sinking fund is a way to save money for something specific by setting aside a small amount each month. Sinking funds work great in your business for things you don’t want to pay for in a single month’s budget, like:
- New camera or lens
- Mastermind or coaching
- A specific course you’ve been eyeing up
- Destination workshop
- Conference or education
- Business workspace remodel
There are no limits on the number of sinking funds a person can have, which is great! You can create a sinking fund for any financial goal that you have. If you currently don’t have any sinking funds in place, here are a few ways they will help you in business.
Utilizing Sinking Funds For Your Business
Save For Recurring Expenses
As business owners, we have annual recurring expenses like insurance, Adobe Creative Cloud, website hosting, etc. Instead of getting caught off guard with paying these annual bills in one lump sum, start saving for those expenses every month. The next time a payment comes due, you will have the money all ready to go without getting hit with fees!
So how do you get started with this? Take some time to write out all of your annual expenses and the cost. Next, figure out when payment is due for each expense. To calculate what you need to save each month, divide the expense amount by the number of months until payment is due. For example, if my insurance is due in five months and it costs $200 here is the breakdown:
$200 / 5 = $40
Going forward, I will start saving $40 a month to make that insurance payment. I suggest saving that money either in an envelope or in a savings account with your bank. It’s important to keep that money out of sight and out of mind so you don’t have the temptation to spend it!
By saving a little each month, you’ll never be blinded or scrambling to pay for those annual expenses again!
Keep Goals Top Of Mind
If you are a goal setter like me, creating sinking funds will help you stay on top of those goals. I’m a firm believer every account should have a purpose and each savings goal should have it’s own account (or envelope.. depending on how you want to save). Since each specific sinking fund is tied to a specific goal, it’s easy to keep track of where you are currently sitting with your goals.
For me, it’s motivating to watch the account grow and see how close I am to hitting my goal. The goal isn’t to save as much as possible, but to save a small amount over time. As I watch my fund grow for my next camera, I’m motivated knowing I’ll soon have a new beautiful paid for camera in my hands!
Save A Little At A Time
Before I set up my sinking funds, I first review my budget to see if I have any money left over to utilize. My number one priority is covering my monthly expenses first. Once that is determined, anything left over is allocated towards my sinking funds. In doing this, I’m only saving what I know I can afford.
There have been a few months where I I didn’t have enough income to cover all of my sinking funds. If that happens to you, don’t fret! To combat this, create a list of your sinking funds with the most important one first down to the least important. Then, allocate the money you have left to utilize towards the top of your list and see how far down you can get. By doing it this way, you are allocating your income to the things that are most important first!
After creating my monthly budget I know my income is covering my monthly expenses plus saving for my funds. I no longer have to put all this pressure on myself or my budget in order to hit my goals! With sinking funds, I know what I can afford to save for each month and make it happen!
Don’t Get Overwhelmed With Sinking Funds
One of the biggest tips I can provide you with is don’t create a ton of sinking funds. Pick and choose what is most important so you can allocate more money to those things. If you try to do too many, you may not make as much as progress if you’d like. Take a look at the example below:
Here is an example of contributing $300 a month to five different sinking funds:
- $50 for a new camera
- $50 for a 85 mm lens
- $100 for the Hybrid Co conference
- $50 for insurance
- $50 for education
At the end of one year, your fund totals would be:
- $600 for a new camera
- $600 for a 85 mm lens
- $1,200 for the Hybrid Co conference
- $600 for insurance
- $600 for education
Now, let’s say your camera broke and you need a new one before the wedding season begins. You have two choices: purchase a camera for $600 or make repairs to your broken camera for $600. Neither one sounds really great.
But, there is a third option.. if you skip out on purchasing that new lens and/or cut savings for education, you’ll already have $1,800 to put towards the camera. With that being said, don’t overwhelm yourself with too many sinking fund categories when there is something you might really need!
Use Sinking Funds As A Financial Tool
If you want to be strategic with your spending, not go into debt, and grow your business –– utilize sinking funds! The biggest thing you’ll need is patience and a plan. If you have both of things you know what you won’t have? Stress!
Saving up for those annual expenses ahead of time, sticking to your goals, and covering your monthly expenses will provide you with peace of mind going forward! So, what do you say? Start creating your sinking funds today! What sinking funds are you going to implement into your business? Tell me below!
If you like this article you may also like:
7 Tips To Creating A Business Budget
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