The Benefits of a Sinking Fund
If you've ever been in a meeting with me, we have likely talked about sinking funds. Some may say I'm obsessed with sinking funds and they might be right! But that's because I think there is a lot of power in saving up for big expenses over time so that it isn't a surprise and shock to your budget all at once. When I talk about sinking funds and how many of them I have, a common question is "should my sinking fund be in a savings account, or should it be invested?"
I will answer that question today in case you have wondered the same thing!
Before we get started with that if you aren't sure what a sinking fund is, check out this article from our awesome Financial Coach, Lindsey Curry.
What type of account should my sinking fund be in?
This depends on what the goal of the money is and how long you have before you are going to need to use the money.
If it is a short-term goal (less than 3-5 years), the best place for that money would likely be a savings account at your bank. I understand this means you will not be earning a lot on that money but the trade-off for that is the value will not fluctuate either. We know that the key to investing is time. That is why for retirement we always say "the sooner you can start saving, the better." Because time will be on your side. When your time horizon is a short window of time before you will need the money, you don't have time to let the market recover if you need the money while the market is in a downturn.
Even though bank savings accounts don't pay much, I do recommend looking for a bank that is paying a higher interest rate. This usually means looking at some of the local banks or credit unions. Those types of banks typically pay better rates than some of the larger banks. Or maybe you would prefer one of the online banks that have a high-yield savings account.
No matter what bank you decide to use, make sure you understand their rules for savings accounts. What is the minimum balance to open the account? What's the minimum you have to keep in there every month to avoid a fee? Will there be a monthly maintenance fee?
It would be best to find a bank/account that does not charge a fee. For instance, the bank I use is a local bank and they pay higher interest rates but the minimum to avoid a fee is $100 in the savings account - so $100 is basically $0 in my mind. Meaning, that when the account gets to $100, I treat it as though we don't have money left in that specific sinking fund account.
If you include my Emergency fund, I have 9 sinking funds that are in a savings account at the bank because the time horizon on them is short. To give you an idea of what I mean, here are a few examples of my sinking funds: vacation, pets, new vehicle/car repair, home repairs, and taxes.
I have separate accounts for them (so that I don't have to keep a spreadsheet of what amount is for each goal) and then I have them nicknamed accordingly on my online banking so it is really quick and easy to know how much we have set aside for each expense/goal.
Update 2/7/2023: We are in a really unique time where your Whitaker-Myers Wealth Managers Financial Advisor can help you with saving into the Schwab Money Market which has a current yield of 4.41% as of 2/6/2023. Be sure to reach out to your advisor to discuss this for your sinking fund money.
When would it make sense to invest my sinking fund?
If your sinking fund is for a goal that is in 5 years or more from now, then it might make sense for you to open a brokerage account and invest that money. If your goal is sooner than that but you are willing to ride the ups and downs of the market, it might be okay for you to invest it. Everyone's goals and tolerance to risk are different so if you have questions about your specific situation, please don't hesitate to reach out to one of the Financial Advisors here at Whitaker-Myers Wealth Managers.
Saving for a down payment on a house, purchasing land, large home repairs, and purchasing vehicles are all examples of goals you might be saving for now but will not need to use the money for several years down the road.
Living the Debt-Free Lifestyle
I always say the "hard part" of living a debt-free life is making sure you plan ahead to pay cash for large expenses. I put "hard part" in quotes because that is certainly a lot better than having debt and payments that haunt you every month! If, like me, you have decided that debt is not a tool you would like to use then hopefully I have made you obsessed with sinking funds too!