At the end of last year, Laura and I both wrote about how we got rid of our student loan debt. It was a huge achievement for both of us and we both worked incredibly hard to do it. Right after we paid them off, my husband and I got engaged and paid for our wedding ourselves which was also a huge expense and I am very proud to say we did it all ourselves and didn’t go into debt!
Even though it was just a few years ago, I think I’ve gotten a lot more money-savvy now that it’s behind me. I know how much debt can cost me and I want to stay as far away from that as I can.
Right after our wedding, we felt incredibly free. For the first time in our adult lives, we actually had some disposable income. We were so used to spending money to pay down debt and then toward a big event that we’d never had money to spare before. As great of a feeling as that was, I wanted to make sure my money was working for me. So my husband and I started using a tactic called sinking funds.
The basic premise is that you divide your spending into a couple of buckets.
- Primary bank account: paying monthly bills, day-to-day living expenses and spending money for fun stuff.
- Separate savings account – or “sinking fund”: big purchases that you only need to access every few months or maybe even once a year.
- Note: separately from all of this, you should also have a plan for investing, retirement accounts, etc. For this post, I am just focusing on the money you are spending on big purchases throughout the year rather than overall savings for life.
The primary bank is easy, that’s where you already have your money put each time you get paid. It’s where you are used to spending out of and you can keep all of that the same.
For the sinking funds, make a list of all the big purchases you want to make. And determine how much you want to spend on each of those things and how soon you will need the money. Say at the end of this year you want to buy plane tickets to Europe and that’s going to cost you $1000, it’s 10 months away, you need to set up an auto payment of $100 a month to go into a separate account. The money will be tucked away for that in a place you won’t be able to access until it’s time to buy those flights.
This second separate savings account is where you create your sinking funds. It should be set up at a bank that has no-fees (and hopefully high interest). I find it really helpful for it to be at a bank outside of your normal account, that way the money feels far away and it can just grow till you need it. I use Ally Bank. But you can check out this article about high-interest accounts and see which one works best for you. Recently, Wealthfront started offering high-interest savings accounts, I have my invested money with them and would absolutely consider them in the future for this type of thing so that those to buckets of money would be in the same place.
Once you have those bank accounts set up, you schedule automatic withdrawals from your main account into that separate place. The payments to yourself add up and by the time you need to book your tickets, you have the money to do it. I set up the payments to go right after I get paid so the money from my paycheck is quickly divided into the places I need it to go. I get paid monthly so I divide my payments up like that, but if you get paid bi-monthly, you could set up two $50 payments rather than one payment of the full $100.
This just works for me. I love that I can use the money in my main account for whatever I need but I always have saved correctly for the big purchases ahead so they don’t take me by surprise. It’s a great way to trick myself into budgeting 🙂
If you are interested in setting up sinking funds for yourself, I highly recommend listening to this episode of Money Peach. He does a great job of explaining it.
Has anyone else used a tactic like this to save for a big purchase? Let us know about your experience in the comments!
PS – this post is part of our blog goals for the year, check out our full list here.