What To Do With A Financial Windfall (the Smart and Wise Ways)

Things you can do with a windfall.

Smart ways you can do with an unexpected windfall.

Once in a while, you’ll hear stories about folks who just won the lottery or a house helper who ended up with big inheritance from the employer. Those are windfalls.

What about that unexpected cash you received during your birthday? The bonus you received last week, or the stimulus check you are about to receive? Those are also financial windfalls.

So, what to do with a financial windfall?

One wrong move can lead to irresponsible handling of a windfall which can eventually end up in financial disaster. I’m sure you didn’t miss the news about that lucky lotto winner who ended up broke in a matter of days, most of them actually.

If you’ve received a windfall, taking your time and making intentional decisions about what to do with the money will serve you better in the long run. 

Discover the smart and wise ways on how to deal with an unexpected windfall.

What is A Windfall

A windfall is a phrase used to describe an unexpected receipt of cash or profit. Think of bonuses, tax refunds, winnings, inheritance, gifts, and more.

In short, it’s free cash you get as a result of doing nothing or just exerting minimal effort. 

Windfall Synonym

A windfall can also be referred to as a bonus, fortune, a stroke of luck, godsend, manna, felicity, gold rush, or boom.

What To Do With A Financial Windfall

If you have the good fortune to find yourself in such a situation, there are several steps you can take to make the money last and set yourself up for a better financial situation.

1) Start An Emergency Fund

Having an emergency fund will give you a financial cushion during an unexpected financial struggle or financial emergencies that may come up.

These can include anything that you didn’t plan for such as medical bills, property damage, family emergencies, unexpected car repairs, or unexpected job loss.

Your emergency fund can give you the peace of mind to calmly deal with the stressful situation. It also provides a way for you to protect your savings and keep you out of debt.

If you don’t know where to start, here’s an article on how to create an emergency fund. 

2) Pay Off Debt

If you have debts hanging around, this is your chance to eliminate them for good. Prioritize your high-interest debts like credit cards or personal loans, which has interest rates of 5% or higher.

Use your windfall to free yourself by paying off your high-interest debts and it will help you save more money long term.

3) Fully Fund An Emergency Fund

Financial gurus recommend that your starter emergency fund should be $1000. 

However, depending on how much windfall you got, you can fully fund a 3-6 months worth emergency fund. 

It is recommended that you do this after you’ve paid off your debt. Additionally, you should only use this fund for true emergencies and if you happen to dip into this fund, replenish it as soon as you can.

4) Invest Wisely

Now that you have a fully-funded emergency fund and a paid off debts, you can use the leftover money to invest. 

You can choose to invest it in a high yield savings account like CITbank and watch your money grow. 

Or, you can choose to be more aggressive with your money and use the discovery chart below to invest in stocks. 

5) Set Aside Some For Fun

I know you have your financial priorities but since it’s a windfall, you are allowed to enjoy some of it. 

You can set aside a small percentage of your windfall and add it to your travel sinking fund

Similarly, you can buy something for yourself that will last long term. After all, you at least need something to remind you of that windfall. 

6) Pay Off Your Other Debts

Now that you’re free from high-interest debts, you can now deal with your other lower interest debts like your home mortgage, car loan, or personal loan.

If you have multiple debts, use the debt snowball method to get you a good headstart in paying off your debts. 

Things you can do with a windfall.

What To Do With A Big Windfall

A periodic small windfall is easy to manage, however, if you end up with a significantly big windfall, it can be overwhelming emotionally and mentally.

If you do end up receiving these large sums of money, take time to make thoughtful and educated decisions so that you can prevent disastrous and sad outcomes. 

Here’s how you can do that.

1) Keep It In A Safe Place

While you are still taking the time to consider all your options on what you will do with the money, make sure to keep it in a safe place, not in your hot hands.

Consider keeping the money in the account that you’re paid from until you’re ready. However, if you have no choice but to take out the money, put in a high-yield savings account and allow it to grow.

2) Hire An Expert

Depending on the amount of your windfall, you might need to hire professionals such as a financial planner, a CPA, and/or an estate planning attorney.

They will help you get organized by creating a holistic financial plan, protecting your assets and determining your tax implications.

Seeking professional advice will help you prevent the chaos that can lead to financial disaster. After all, having a team of advisers can help you make the right decisions.

3) Know Your Tax Implications

Receiving a big windfall has its tax implications unless it is a life insurance benefit, which is tax-free.

Any other windfalls can be taxed as an income therefore, you should not be surprised with a tax increase come tax time.

However, a tax professional can help you determine the most tax-efficient way to access and enjoy your new wealth without worrying about Uncle Sam.

5) Consider Different Payouts

If you’re given payout options, consider receiving annual payouts rather than the lump sum. It will give you the chance to make lots of smaller decisions over several years, rather than overwhelm yourself with the need to make big decisions at once.

On top of that, it will prevent you from making those impulsive and irrational decisions that can lead to financial trouble down the road.

Final Thoughts On What To Do With A Financial Windfall

Every windfall is an opportunity to take a big step towards your goals — or a distraction that takes you further away. So the result will all depend on how you choose to spend the money.

Now, it’s your turn, have you decided on what to do with a financial windfall?

Related Money Management Articles:

Here are the smart and wise ways on what to do with a windfall.

What To Do With A Financial Windfall(the Smart and Wise Ways)

How To Save To Buy A House (when you’re on a tight budget)

how to start saving on a house

The best tips for saving for a house that you need to know.

If you have a home-buying plan in the next five years, or even if you do plan to buy a house sooner than that, you still might want to start thinking about how to start saving money for a downpayment on a house.

However, saving money for a house especially when you are on a tight budget can be a really daunting task.

But it doesn’t have to be that way, today I will share with you best tips on how to save to buy a house while renting so that you’ll have your downpayment ready when you’re ready to buy.

Tips on how to save to buy a house that you need to know when saving for your first house.

How To Save To Buy A House

You do not have to be wealthy to start thinking of buying a home, you just have to start somewhere. Sure, it’s not easy but it is possible, you just have to set yourself on the right track for buying a home. Here’s how:

SET YOUR GOAL

In everything you do, goal setting is important and buying your first house is no different. For many of us, a home is the single biggest purchase we’ll make in our lives and probably the one purchase we’ll have the longest.

Therefore, having a clear savings goal that defines what you want in a home is very important.

THINGS TO CONSIDER WHEN SETTING YOUR GOALS

Here are things to consider when you are ready to meet with your real estate agent.

JOB STATUS. Are you or your husband planning to keep your current job for a few years or keep it long term? Job stability plays a big role when planning to buy a home. After all, it’s what pays the bill.

TYPE OF HOME. Do you want a condo or a single-family home? Writing down the pros and cons of each type will help you in your decision.

LOCATION. Decide on what kind of neighborhood you want. Consider the commute to and from work, quality of schools, crime rates, accessibility to transportation, and even the distance to groceries, restaurants, or malls.

FEATURES. Decide on all the features that you want your house to have and write them down. Rank the features based on what matters most to you and your husband. Keep the list as this will come in handy when you start evaluating home.

DECIDE ON YOUR BUDGET

Now that you already know the kind of house you want and decided on the best location, it’s time to find out how much you can afford.

Do not rely on what the bank tells you, find out what you can comfortably afford. Additionally, you do not want your life’s biggest purchase to wreak havoc in your finances.

Add up the total home costs, including monthly mortgage payments, property tax, homeowner’s insurance, and if the home is a part of a homeowner’s association, don’t forget to include homeowner’s association fees.

Financial gurus like Dave Ramsey recommends that your monthly home cost should not be more than 25% of your take-home pay.

After you’ve decided on how much you can afford, plan on saving 20% for a downpayment if you can to avoid the added monthly cost of private mortgage insurance, and also get a better rate.

DECIDE ON YOUR TIME FRAME

The next step is to determine your time frame. If you and your spouse plan to buy a house in five years, then you’ll have to figure out how much money you should set aside every month.

For example, if your 20% down payment is $50,000, you will have to save $834 a month ($50,000 / 60 mos) for five years.

Best Ways To Save Money For A House

CREATE A BUDGET

Now that you know how much you’ll need to save, it’s time to re-evaluate your budget or create one, if you haven’t yet.

A monthly budget will give you an overview of how much money coming in and how much money going out.

The easiest way to establish a budget is to use a monthly budget template — which shows all your net income. Then subtract all costs like rent, debt payments, utilities, student loans, and other expenses from your net income.

If budgeting confuses you, you might want to check out this post on how to make a monthly budget.

After creating your budget, here comes the fun part — how much money is left? The goal here is to increase the money left every month so that you can put it towards your down payment.

So, where can you cut costs?

 MOVE IN A CHEAPER RENTAL

Rent is probably the most expensive monthly expense that you have in your monthly budget. Re-evaluate the space that you currently have. If you and your husband do not really need a lot of space, consider downsizing and move into a cheaper rental.

If moving is not an option, consider getting a roommate or renting out your extra space, or even negotiate with your landlord. Extending the length of your lease can enhance your negotiating power.

REDUCE YOUR EXPENSES

Let’s be honest, not all of our monthly expenses are essential, therefore there is always a way to reduce those expenses, probably even eliminate them for good.

When you pay more attention to your spending, you’ll find that you really don’t need that expensive wireless plan, the 1000+ cable channels, or that expensive gym membership.

Similarly, you do not need to dine out every week with friends. Have a potluck party instead.

Everything is negotiable, including your bills. Have these guys negotiate to lower your bills.

PAY OFF YOUR DEBTS

If you have other debts like credit cards, car loans, personal loans, or student loans, consider paying them off first before saving for a house.

Debts could easily limit the amount of money you can put towards your down payment. Once your debts are paid off, you’ll be able to free up hundreds or even thousands of dollars that you can put towards your down payment. 

BUILD YOUR CREDIT SCORE

Your credit score plays an important role in your ability to borrow from mortgage lenders and secure a good interest rate.

You might even be able to get away with a low down payment if you have a strong credit score.

Your credit score is based on your credit report — your total debt, any missed or late bill payments, the number of credit accounts you have and more.

If you’re struggling to build your credit, check out this article on how to rebuild your credit.

SET UP A SINKING FUND

A sinking fund is a saving designed for a specific purpose, in this case — your down payment. With a sinking fund, you’ll know what you are saving for, how much money you’ll put in every month, and when you’ll need to use it.

When you have a downpayment sinking fund, you’ll be able to track how much you have and how much more you need to save.

Need to set up more sinking funds? Check out these sinking fund examples that every couple should have.

SAVE YOUR WINDFALLS

Don’t you just love those periodic windfalls — think of bonuses, tax refunds, wedding, and birthday gifts.

Although it’s tempting to splurge a bit, you can actually make the process of saving money for a downpayment easier or even shorten the process by banking on all your windfalls.

HALT YOUR RETIREMENT SAVING

Don’t worry, this is only temporary. The more money you can put towards your down payment, the sooner you can resume your retirement savings.

However, if your company matches your 401(k) plan contribution, don’t stop your retirement savings, instead, reduce your contribution up to what the company matches.

If you fail to do it that way, you’ll just be leaving money on the table.

LET YOUR SAVINGS GROW

There is no better place for your down payment money than in a high-yield savings account. Put your money to work while you’re still saving and watch it grow.

High-yield savings accounts are bank accounts that earn you a higher interest rate for deposits than a traditional savings account. 

A higher interest rate means a better return on your money. We use CITbank for our high-yield savings account. Check out their savings rate here.

EARN MORE MONEY

Earning more money means more savings. Therefore, turbocharge your income by working overtime or picking up a side hustle.

However, there are endless ways to make extra money but not all of them are viable and not all of them can be worth your time, so tread carefully.

If you are looking to use what you already have — like your car or phone, check out these delivery gigs that you can do to make extra cash.

If you want more side hustle ideas, check out the 32 legitimate ways to make extra money.

SET YOUR SAVINGS ON AUTOPILOT

I’m sure that you’ve heard it before that the key to any sound financial strategy is automation unless you’re a saver by nature, of which most of us are not.

You should be able to set up an automatic transfer from your checking account to your high-yield savings account. Once it set up, you are good to go.

ASK FOR FAMILY ASSISTANCE

Probably not the best tips but if you have a family who is willing to lend a hand, why not? It’s not like you are not going to pay them back.

My husband’s parents helped us in our first home’s down payment and we were able to pay them back sooner than we thought. Because we didn’t have to pay private mortgage insurance and we got a better rate, we were able to save money and pay them back sooner.

Final Thoughts On How To Save To Buy A House

Saving for a house shouldn’t be so hard if you follow all the tips mentioned above. Yes, it can be a long process but the key here is dedication. Keep your eyes on the prize and you’ll most likely get it.

For sure, it will involve sacrifices here and there. After all, it will be the biggest expense of your life. But that’s just the tip of the iceberg, once you’re a homeowner, the expenses do not stop.

Now it’s your turn, how are you saving for a house?

Related Saving Money Articles:

Here are tips on how to save money to buy a house.

How To Save To Buy A House (when you’re on a tight budget)

How To Invest And Make Money Daily

Find the best investments for millennials.

There’s no better time to start investing than now when stocks are at their all-time low.

Have you ever tried investing and got daily returns? Is there even such an investment that earns you a daily profit?

Yes. It’s absolutely possible to invest and make money daily, although the better question is whether this actually aligns with your investment goals.

If you want to invest money for long-term goals like retirement then investing to earn daily should probably not your main focus. The reality is the market will go up and down.

Those who are on it for the long haul will continue to invest their money even if there’s a dip and will eventually end up with some very strong returns.

However, if your goal is short term and just want to make some quick cash then you are in the right place. This article will show you how to invest and make money daily.

But before we get to the nitty-gritty of making money daily through investments, let’s take a look at what you should be doing first.

Things To Consider Before Investing Money To Make Money

Fully Funded Emergency Fund

Before you even start investing, make sure you have money set aside to cover for emergencies. I highly recommend having at least 3-6 months worth of expenses put away.

Investing has its risk and you should never count on that investment for emergencies. If you want to know more about this fund, you would want to check out this article on setting up an emergency fund.

Paid Off Debt

Another thing to consider is to have all of your debt paid before you start investing in the stock market. Even the investments with the highest returns will not help you get out of debt if you still carry those high-interest rate credit cards.

Check out this article on the best tips on how to pay off debt. Once you are out of debt, stay out of it.

Clear Goals

Having a clear goal will help you in choosing the right investments to make money. If your goal is a quick return on your investment, then you would look for the best short-term investments.

But if your goal is to make money over time, then you would look long term investment like index funds.

Stay Disciplined

Staying disciplined and having clear goals go hand in hand. Investors will tend to be greedy at times and when fear and green interferes, it will be tough to remain rational when making decisions.

However, if you focus on your goals and stay disciplined, this will not be a problem.

Investing Money For Beginners

If you have money in a savings account, then you probably know that simply placing our money in a savings account won’t make you rich. This one of the reasons why most people become money investors. When you make money investment, you learn how to make money from money.

Beginner’s Tool For Investing

Use this handy investing tool to compare investment platforms and find the best investments that are perfect for you.

It is an easy to use guide that is made for beginners.

Final Thoughts On How To Invest And Make Money Daily

Sure, it possible to invest and make money daily but it is also possible to invest and lose money daily.

They say investing is gambling but I beg to differ. If you know what you are investing on then it’s not gambling.

It is no secret that investing can be a source of passive income but it is no joke how complicated it is when you do not know where to start.

To be successful in this field, you need to educate yourself enough before diving in.

When you learn how to invest and make money daily then all the times you spent educating yourself will be all worth it.

Remember, you can make the most out of your money investment by weighing the pros and cons before you put in your money.

Now that you know how to invest and make money daily, you can start making investment decisions.

invest and make money daily

How To Pay Off Student Loan Faster (Even If You Are Broke)

actionable tips on how to pay off your student loans fast

Actionable tips on how to pay off student loans fast.

Have you ever found yourself dreaming that your student loan is paid off and you are completely debt-free?

Well, you are definitely not alone. According to Forbes, 44.7 million Americans are dealing with debt.

Today, I will share with you tips on how to pay off your student loan faster so that you will achieve your debt-free goal.

So let’s dive in.

Important Steps On How To Pay Off Your Student Loans Faster

Strategies to pay off student loans fast.

Know Your Why

To start your journey and before you get into the financial details, you have to get into the why you want to do it.

It can be because you hate debt and knowing you owe someone keeps you awake at night. Or, you want the debt to be taken care of so that you can buy a house or add another financial responsibility.

No matter what your “why” is, having that in mind will help keep you going as you start making hard decisions and sacrifices.

In addition to that, having a clear reason will make it easier for you to stick to your goal.

Learn How To Create A Realistic Budget

If you don’t have a budget yet, this is the time to start one. Knowing how much you’re earning every month and how much you’re spending is an important step in your student pay off plan.

Doing a budget will determine how much money you’re going to be working with.

Know What You Earn

Knowing how much you make will determine how much “extra” you can put into your loans and how quickly you will be able to pay it off.

If you are salaried then it will be easy to figure out how much you earn every month but if you are self-employed, has side hustles or has a seasonal job, it will be a little tricky since your income will vary a lot.

So the first thing that you will do is to gather your pay stub or direct deposit information and write your net pay on a spreadsheet or a notebook, whatever you want.

Your net pay is the amount you get after all the deductions like FICA, social security, health insurance, and other deductions.

You can use this fillable budget printable to make it easier for you.

If your income is variable, write down the last three months’ worth of paycheck and get the average or if your income varies for twelve months, get the 12 months’ average.

For example, if month one, you made $2400, month two, you made $3000 and month three, you made $5000.

$2500 + $3000 + $5000 = $10400

$10500 / 3 months = $3500

Your income can be your salary but it can also include other things like bonuses, tax refunds, child support, part-time jobs, overtime, and more. So, don’t forget to include those in your total income.

Know What You Owe

Not knowing the details of your student loan is the perfect ingredient for failure. You cannot create a plan to repay your loans quickly unless you know how much you owe.

Things You Need To Know About Your Student Loan

Interest Rate: percent of principal charged by the lender for the use of its money

Minimum Payment: the amount you’re required to pay every month to stay current with your account

Terms: the number of years you have to pay off your student loans

You can get all the details of your student loans from the Department of Education if you have federal student loans. 

Cut Your Expenses

Now that you know how much you’re making and how much you owe, it’s time to cut down your expenses so that you will be able to put more money into your student loan payment.

For most people, this is where they give up because no one likes to change their comfortable lifestyle. But not you. You wanted to be debt-free more than you wanted a new Chanel purse.

Review your expenses closely and eliminate expenses that you can live without and work on reducing essential bills.

For example, rent or mortgage is one of the biggest expenses in everyone’s budget. You can reduce this amount if you can find a roommate or you can refinance your current mortgage to have a lower monthly payment.

Similarly, if you have a gym membership, you can cancel it and start working out from home. You can even run or bike outside for a workout.

Lower Your Rates

Of course, not all expenses can be eliminated. Bills like your utilities, cellphone bills, internet, cable or car insurance are some of the things you need in your life. And you can find lower rates for these expenses if you ask. 

Therefore, your action plan is to gather all your essential bills and call each company and ask for a better price.

The good news is that it doesn’t have to be you, this company can negotiate your bills for you.

But don’t just take my word for it, try them out. You won’t pay a cent if they were not able to get you a better price. What have you got to lose?

Know Your Credit Score

Knowing your credit score is vital if you want to refinance your student loan. However, this is not only important for your student, but you’ll also need a good credit score when you apply for a job, a new credit card or buy/rent a new house.

A good credit score is determined by:

  • Longer credit history
  • Fewer new accounts
  • On-time bill payments
  • Total debt that is <30% of the credit limit
  • A good variety of accounts

You can view your credit report and credit score for FREE from these companies;

Annualcreditreport.com – you can view your credit report for free

Credit Karma – you can view your Vantage score but not your FICO score

Banks like Chase, Discover, Barclay, and Capital One – let you view your score if you are a member

Now that you know your score, make an action plan to improve it. You are gonna want to check out this post on how to rebuild your credit score.

Know Your Payment Plan

Besides knowing the interest rate, minimum payment, and term of your student loan, it is also important to know your payment plan. 

Your payment plan will determine how fast you’ll pay off your loans.

Standard Plan – default standard plan with a 10-year term and the least amount of interest.

Income-Based – you’ll pay 15% of your discretionary income and can be forgiven after 25 years.

Income-Contingent – the amount you pay for 25 years will depend on your family size, loan amount and salary, usually 20% of your discretionary income.

Extended – your payment can be fixed or graduated over the life of the loan.

Graduated – your payment will increase every two years for 10 years.

Pay As You Earn and Revised Pay As You Earn – your monthly payment is capped at 10% of your discretionary income. These plans are best for those experiencing financial hardship and cannot afford the payment.

Income-Sensitive – your monthly payment will be 4-25% of your gross monthly income and it must be renewed every year for 10 years.

Public Service Loan Forgiveness – if you work for a nonprofit company, they can forgive your loans after 10 years of payments.

Refinance Your Student Loan

Refinancing is one of the simplest ways to save money on your student loans. A lot of companies are offering student loan refinancing and you can get a lower rate depending on your credit score.

Every little bit of interest that you can save is money in your pocket. Check out how much you could save here.

So your action plan is to list and contact a few refinance companies and see what rates and terms they can offer you.

Set Your Debt Payoff Goals

When you are starting your student-loan-payoff journey, you need to set goals. Goals keep you on track and motivate you to keep going. 

However, your goals should not just be simple, they need to be SMART goals.

S – pecific

M – easurable

A – chievable

R – ealistic

T – imely

Therefore, instead of saying,

“I want to be pay off my student loan in 5 years”

You should say,

“I want to pay off $40,000 of student loan in 5 years by adding an extra $300 in my monthly payment. I will do this by cutting my expenses and picking up side hustles.”

Check out this post for more debt payoff tips.

Snowball Your Student Loan

The snowball method is applicable when you have more than one loan and it’s the process of paying off the smallest loan first and work towards the biggest loan.

Now, it may sound ridiculous but if you think about it this way, as you pay off the smallest balance first, you’ll feel your progress as you get those quick wins that will motivate you to keep working on paying off your student loans.

The snowball effect will help you achieve your goal faster. Learn more about paying off debt with the snowball method here.

Pay More Than The Minimum

You probably already know that paying just the minimum will get you nowhere. You’ll end up paying off your debt longer and paying more in interest.

So as you cut down your expenses and make more money, put extra into your monthly debt payment.

Here’s the most important part, you have to make sure your extra payment will be applied to your principal. You can do this by contacting your loan servicer when you make your extra payment.

Throw all “windfalls” To The Student Loan Payment

Have you ever found yourself with sudden extra money in your hands? I bet you did. They came in the form of raises, bonuses, tax refunds or probably inheritance.

Windfalls, when you use it towards your student loans, will help you significantly lower your balance and decrease the interest you’re paying.

Never Rely on Student Loan Forgiveness

Student loan forgiveness may sound like the best plan to tackle your student loan, but don’t let it deceive you. 

Apart from the multiples requirements to meet to be eligible, it is not even guaranteed. You’re better off getting a well-paying job and start paying off your student loans.

Earn More Money

One of the best strategies to pay off your student loans is to make more money. There is no limit on how much you can earn. The more you make, the sooner you pay off your student loan.

But here’s the thing, it will only work if you use the extra money to pay off the loan. You earn more to pay more, not to spend more.

Check out these side hustles that you can do to earn more money.

Stay Motivated

You can do this by using a goal planner, where you can write your goals, thoughts, reasons why you want to achieve your goals and so on. This way will keep you focused and reminded of why you are working on this goal.

Another way to stay motivated is to use visual progress trackers. These trackers will show you how far away are you from achieving your goal and how much you have accomplished.

Celebrate

You do not have to wait until you achieve your ultimate goal of paying off your student loan to celebrate. Celebrate your quick wins, every little one. After all, you work hard for it.

There you have it! That’s how you pay off your student loans fast.

Final Thoughts on How To Pay Off Student Loans Fast

Paying off your student loan is a lengthy process and there will be a lot of impediments along the way.

However, as long as you do the tips and strategies mentioned above, you will be in a good place and I have no doubt that you will succeed.

Related Debt Payoff Articles:

Tips on how to pay off student loans fast

How To Pay Off Student Loans Fast Even When You Are Struggling Financially

Sinking Funds Example For Couples

Sinking Fund Examples For Couple

The sinking funds every couple should have.

You probably just heard about sinking funds and was wondering what sinking funds example that you can include in your budget are.

But before we get to the examples, let’s first get into the nitty-gritty of a sinking fund so that you will have a better understanding.

Here are some of the best sinking funds example that you can add to your budget as a couple.

SINKING FUND METHOD

If you are looking for a more technical definition of the sinking fund method, you can check it out here.

If you’d rather have me define it in a friends-chatting-over-coffee way, read on.

The sinking fund method is merely setting aside a certain amount of money every month for a certain period until you’ll come up with the large amount you need to take care of a bill or a big purchase at that time.

Did I just confuse you more? I thought so.

Let’s try again. The sinking fund method is the method of saving a smaller amount of money each month to cover a one-time big financial expense or an irregular predetermined expense.

For example, let’s say you have a home insurance bill worth $1,200 that you pay every January.

That ‘s a lot of money coming out of your January budget. You might even have to tap into your emergency fund or your savings.

Enter sinking funds.

If you use the sinking method, you will set aside $100 every month starting January until December. 

By the end of December, you would then have the full amount of $1,200 that you need to pay your home insurance in January. Then you would start all over again.

Better? Not yet?

Ok, here is another example. Let’s say you and your husband will go on a vacation 10 months from now.

After doing the planning, you projected that you will need $2,000 for pocket money. According to the sinking fund method, you would need to set aside $200 every month for 10 months.

Consequently, when your vacation time comes, your pocket money is ready.

Now you get the idea.

SINKING FUND GOALS AND BENEFITS

Having a sinking has its benefit, which includes:

  • Help You Afford What You Want
  • Keep You Out Of Debt
  • Keep You On Budget
  • Save You From Using Your Emergency Fund
  • Give You A Peace Of Mind
  • Help You Achieve Your Financial Goals

SINKING FUNDS EXAMPLE

HOME REPAIR FUND

Not every home is perfect. Something in the house will always break and will need repair. It can be the plumbing, furnace, roof, driveway, and more. You can use this fund to cover those types of expenses.

NEW APPLIANCE FUND

Nothing lasts forever, too, so if you know that one of your appliances is on its last legs, you might want to start saving for a replacement.

FURNITURE SINKING FUND

Furniture can be expensive. Your furniture sinking fund can cover the purchase of your new furniture.

CAR REPLACEMENT FUND

I drive an old Nissan Sentra with almost 200K miles on it. I know that it will give up on me soon. However, we already have a sinking fund that can go towards a replacement when that happens.

CAR MAINTENANCE FUND

Oil change, new tires, car registration, and more are some of the expenses needed to maintain your car. The car maintenance fund can help you cover those expenses.

TRAVEL FUND

You need money for fun too. Road trips, cruises, anniversary trips, birthday trips, or holiday trips can wreak havoc to your budget. But when you have a travel sinking fund, you’re covered.

PROPERTY TAX FUND

If you have an escrow, you might not need this because your escrow will take care of it.

But if you can remove your escrow, do it. Don’t let the bank keep the interest earned by your money.

I recently removed ours, and I’m so happy I did.

If you decide to pay your property tax yourself, be diligent in setting aside money for that purpose. 

CAR INSURANCE FUND

I used to pay our car insurance every month, but I found out that I can save more if I do a six-month plan. 

HOME INSURANCE FUND

We pay our home insurance every year, and it’s not cheap. It used to be with our escrow too, but now, I am paying it myself. I get to keep the interest earned in a year.

UTILITIES FUND

I don’t know about you, but where we live, our utilities fluctuate due to the change in season. Winter season spikes up the heating bill while during the summer season makes the AC work really hard. 

Therefore it helps to have the utility sinking fund to offset the difference.

BABY FUND

This baby sinking fund will help you if you are currently pregnant. It will cover everything that the baby needs upon birth.

MEDICAL FUND

This fund will cover anything beyond your copays because let’s face it, not everything will be covered by your insurance. 

FERTILITY FUND

When you are trying to conceive, you can start setting aside a fund for ovulation kits, pregnancy kits, supplements, etc. If you are struggling with infertility. Use the money for fertility treatment. 

LIFE INSURANCE PREMIUM FUND

If you pay your premium monthly, then you might not need this fund. However, if you have the option for an annual payment and you can save money, then go for it. 

CHRISTMAS OR HOLIDAY FUND

Most people tend to blow off their budget during the holidays because they didn’t prepare for it. If you are one of them, starting a holiday fund now will help you during this year’s holiday season. 

Start your sinking fund with these sinking funds example for couples.

GIFT FUND

I’m sure you have loved ones that you want to buy a gift for every year. Birthdays, weddings, anniversaries, and the list goes on.

It can quickly add up that you don’t even want to know how much you spent for the whole year. Having a gift fund will help protect your budget. 

CONTINUING EDUCATION FUND

I work in the healthcare field, and I need to complete a certain amount of continuing education units to be able to renew my license. 

PET CARE FUND

Pets are like babies. They have expenses too. Food, vet, insurance, grooming, outfits, and more. 

We started one for our fur baby, and I can’t even tell you how many times the pet sinking fund saved our budget. 

MEMBERSHIP RENEWAL FUND

Gym membership and other subscriptions that you have can get really expensive once they’re due. Setting aside money for it every month will make it doable. 

IRS SINKING FUND

We just started doing this when we were caught off guard in 2019. We owed the IRS money, and it was a lot of money. 

Since then, although we reevaluated and reworked our tax plan, we still keep a fund for IRS payment just in case. 

HOW DO YOU MAKE A SINKING FUND?

1) List the sinking fund categories that you need. 

Ex. Car insurance

2) Identify how much you need for each sinking fund. 

Ex. Car insurance $600

3) Indicate the number of months until you need the money for each fund. 

Ex. Car insurance $600 6 months

4) Establish your monthly payment by dividing the amount you need with the number of months until you need it. 

Ex. Car insurance $600 6 months $50/mo

5) Update your monthly budget to include a category for each of the sinking fund expenses. 

Ex. Sinking Fund For Car Insurance $50

HOW TO ORGANIZE SINKING FUNDS

By having an efficient way to organize your sinking funds, you’ll most likely make sinking funds work for you. Besides, the idea of having sinking funds is to make your life easier, not more stressful.

CASH

You can use cash envelopes to organize your sinking funds. Every paycheck, you simply withdraw the amount of money you need for each of the sinking funds that you have.

Put them on the designated envelope and keep them in a safe place. If you are a pen and paper gal, you can use this sinking fund worksheet to track your sinking funds every month.

USE ONE SEPARATE ACCOUNT

If you do not want piles of money lying around, you can open a separate account for all your sinking funds.

You can use the same sinking fund worksheet to track how much you have in each sinking fund.

You can set up an auto-deposit so that you do not have to transfer the money every paycheck manually.

USE BANKS THAT ALLOW YOU TO OPEN MULTIPLE ACCOUNTS

You can also utilize banks that allow multiple accounts and set your sinking fund monthly payments in autopilot.

We have quite a list of sinking funds, and we personally use Capital One 360. Capital One 360 allows up to 25 savings account, and they make it easy to transfer money to and from your main bank account.

I set it on autopilot, so every paycheck, I have a set amount debited from our main account to go to each of the sinking funds.

This is absolutely my favorite because it makes everything effortless. 

INCLUDE THEM ON YOUR BUDGET

Whichever way you use to organize your sinking fund, you still need to make it a point to include these sinking funds payment on your monthly budget.

There you have it!

Having sinking funds can help you in a lot of ways, from keeping you out of debt to helping you afford what you want. Also, starting a sinking fund is really easy, and maintaining it is not hard either.

If you haven’t started yet, review the sinking funds example above and start one now.

Sinking Fund Related Articles:

If you are wondering what sinking funds you can add on your budget, here are some of the best sinking funds examples.

Sinking Fund Examples For Couples.