Yahoo Finance This one thing could drastically reduce your money stress in 2024
The cost-of-living crisis is putting many Aussies under extreme financial stress.
Managing household cash flow can be challenging at the best of times. Throw in a cost-of-living crisis and ever-increasing interest rates, and you’ve got a recipe for money overwhelm. So, have you ever thought about a sinking fund?
We’ve all experienced that gut-punch feeling when you finally clear the decks of expenses and suddenly realise your car registration is due the following week. Luckily, a little bit of organisation can make covering those larger expenses a lot easier.
Here’s what a sinking fund is and how it can help cut back your money stress.
What is a sinking fund?
A sinking fund is a regular contribution of money into a pool reserved for covering unexpected expenses. They’re traditionally used in strata property arrangements. The owner of each lot contributes to a shared fund each quarter to amass a pot of savings to cover things like insurance and unexpected costs.
The key benefit of a sinking fund is that it front-loads the financial impact of big expenses so, when they fall due, the money is already there.
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You can use this same system in your personal finances too. You can set aside a regular payment towards your bigger expenses so that when they fall due, you’ve got the cash ready to go.
What can I use sinking funds for?
You can use sinking funds for anything you want. They’re commonly used for things like annual car registration, insurance payments, home repairs or improvements, but you can get as creative as you like.
You might set up a sinking fund to buy tickets to see your favourite artist if they announce a tour. Or to fund an annual end-of-year celebration with friends. Or to update your wardrobe every six months.
How are sinking funds different from regular savings accounts?
Sinking funds differ slightly from regular savings accounts. They have a specific purpose, a specific target date and, rather than aiming to amass as much as possible into the account, the idea is that you withdraw the money at some point, and then replenish it over the next period.
Using your sinking funds becomes a cyclical exercise. Say you set aside $15 a week throughout the year towards your car registration. On the due date, you drain the fund bank to zero, and start again the following week preparing for next year.
How to set up a sinking fund
Setting up a sinking fund is easy. All you need to do is take an expense you want to fund – for example, annual car insurance at $1,000. Divide that total by the number of times you get paid in a year – for example, 52 times if you’re paid weekly. That number will then give you the amount you need to set aside from each paycheque to cover next year’s insurance payment without having to dip into any of your savings or throw off your budget when it falls due.
In this example, just $19.25 from every paycheque will eliminate the stress of funding your car insurance each year. Automate the payment into your chosen savings fund and you don’t even have to think about it. Plus, saving up for annual payments can mean you pay less overall, as sometimes it’s cheaper to pay upfront rather than monthly.
Tip: if you’re already part way through the year, you can still get started with sinking funds. Instead of working out how much to set aside across the whole year, take your target total and divide it by the number of weeks between now and the date it falls due. You can set aside more each week initially until you get to the target date, and then scale it back afterwards and work to a full-year sinking fund schedule.
Spend some time with your expenses and see if you can make use of sinking funds in your household budget and reduce money stress in 2024.
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