First things first, let’s cover Emergency Funds
You may have heard about emergency funds ( or F*** You Funds) as a savings account of accessible cash to have in case of any emergency you might befall.
This is means that you can access back up money for any unexpected scenario. For example, your car breaks down and you have a hefty repair fee, or you might get let go from your job out of the blue and you need money to pay the bills while you look for a new one.
You can find the ins and outs of emergency funds here in a previous blog, but you essentially want approximately 3 months’ worth of necessary living expenses in an account. This means all your utilities, approximate fuel costs, food and rent/mortgage for each month needs to be totted up and multiplied by 3. If you can afford to do more, go for it!
The best place to keep this is in a normal accessible (not stocks and shares) ISA, so that you won’t be taxed for it or incur costs for withdrawing money.
Normally, I would then invest anything else I saved once I’d built up my emergency fund to a comfortable amount.
However, investing money should only be for long-term savings goals. For example, retirement. What if you want to put aside something shorter-term goals?
Let me introduce Sinking Funds
Having the fore-sight for future expenses will help you out massively when it comes to your financial peace of mind. It can also mean you can continue to contribute into your long-term savings accounts even during times of the year where your cash expenditure might hike up e.g. Christmas, car insurance renewal dates or holidays.
So how does it work?
Sinking funds are the perfect tool to prepare for these short-term planned expenses (note – the emergency fund is for any unplanned expenses).
Lots of new mobile banking apps such as Monzo and Starling (what I personally use), have features that let you put money into saving ‘spaces’. But you can just as easily open different savings accounts with your current traditional bank to house your sinking funds.
Let’s use the example of Christmas. We all know Christmas is a big spending time – there’s presents, Christmas parties, often travelling to visit family and festive events with friends. Instead of dreading the looming big spend in December, you could start putting small bits of cash away in January that year. If you saved only £20 each month for the 11 months leading up to Christmas, you would have £220 sitting there! £220 ready for guilt-free spending on your loved ones.
You can use exactly the same method for a holiday you’re planning next year!
A way to make sure you do actually put the money aside each month is to automate this. Set up a direct debit from the account you receive your pay-check in to your saving space for the date you know you’ll get paid every month. This way, the money will be gone before you notice and if you can’t see it, you can’t be tempted to spend it!
What can you use them for?
I’ve named a few already but there are a multitude of things you can use sinking funds for. I have personally started a sinking fund to help prepare for potentially higher gas and electricity bills this winter…
Other uses could include:
- planned house renovation
- car insurance and tax
- car maintenance (service and MOT)
- a course or conference you want to attend
- holidays
- child back to school costs (uniform, stationary)
- career break or sabbatical
- a loved one’s birthday gift
- your wedding
Benefits
The best benefits of sinking funds are that they put you in control of your money. They also help you avoid debt at times of big spending. According to National Debt Advice, over a third of the people in the UK borrow money at Christmas. That’s almost 17 million people! Not only that but 1 in 20 people will skip paying a bill at Christmas. These statistics are crazy but very real and just more proof that good financial fore-sight with sinking funds could help you get prepared for a very financially tricky time of year.
You can spend guilt-free when you need to. If you’ve saved up money for a particular occasion, you know you can enjoy and spend without worrying that you’re eating into your fuel or food budget. Truly relax on your holiday or at your festival and know that you’ve created a financial cushion for yourself.
See what I mean?
Emergency funds are absolutely crucial and I would say these are the first things you need to put in place once you’ve cleared any debt and start on your saving journey. But once you have yourself covered for any emergency expenditures, preparing for planned expenditures is really empowering.
If you want to know any more about my experience with the Starling Banking app or how I set up my sinking funds, hit me up on Instagram (@thisvetcan_blog)! Thanks for reading once again 🙂
ThisVetCan 