This One Simple Money Hack Keeps One-Off Expenses From Wrecking Your Budget
“Many people don’t make progress financially because every time a one-off expense comes their way, they’re not prepared for it,” Kopelman said. “This can lead to little savings or added debt — and neither are good.”
Think about it this way: When you’re budgeting for your monthly bills, do you make room for things like annual car registration, holiday gifts, insurance premiums, home repairs or renovations, or seasonal travel? Probably not, because they feel less immediate than everyday needs — until they come due.
Setting Up Your Sinking Funds
While you may already deposit money into an emergency fund every month — and hopefully hold that money in a high-yield savings account — there are some practical differences in how to approach a sinking fund. Most people benefit from multiple sinking funds, each earmarked for a specific planned expense, whereas an emergency fund is more like a giant pot you can dip into when an unexpected crisis arises.
“The best way to plan and prepare is to set up separate high-yield savings accounts for each irregular expense, then put money toward it monthly,” Kopelman said. “If you know your property tax bill is $5,000, save $417 a month to be on track for when it’s due.”
In addition to the sinking funds for the irregular expenses you can anticipate, Kopelman also wants you to maintain an emergency fund for truly unexpected events — the kinds of costs sinking funds aren’t meant for.
If you feel like you’re living paycheck to paycheck, start small: Pick your highest-priority irregular expense (for many people that’s auto maintenance or holiday gifts), estimate the yearly cost, divide by 12, and begin automating a modest monthly transfer. Even $25 to $50 a month earmarked consistently will add up and reduce the need to use credit when the expense hits.
Bottom Line
If there’s one thing that’s regular in life, it’s that you’ll hit irregular expenses. Something will need to be repaired. Insurance premiums will come due. Someone on your holiday shopping list will have expensive taste. But if you rely on an undervalued savings tool called a sinking fund, you can budget wisely for these costs and avoid debt.
This article is part of GOBankingRates’ Top 100 Money Experts series, where we spotlight expert answers to the biggest financial questions Americans are asking. Have a question of your own? Share it on our hub — and you’ll be entered for a chance to win $500.
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This article originally appeared on GOBankingRates.com: This One Simple Money Hack Keeps One-Off Expenses From Wrecking Your Budget
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