Homeownership is a huge responsibility, and one of the biggest strains it can cause is your finances. Without adequate planning and precaution, you’re at risk of hurting your bank account in several lasting ways. This is why you must harness the power of sinking funds now. The earlier you start, the greater the benefits you’ll enjoy.

What’s That Again?

If you haven’t heard of it until now, then your financial literacy needs some fine-tuning. The idea behind sinking funds is that you can pay off a predetermined expense by saving for it months or years ahead of time. The term “sinking” refers to how your debts decrease or “sink” whenever you set aside money for the expenses you anticipate making in the future.

It can be the down payment for your mortgage or the cost of the homeowners insurance, among others. Preparing for all of these instead of depending on your credit cards can significantly reduce your financial burden in the long run and make homeownership so much more cost-efficient.

But You Have an Emergency Fund

That’s a good point. The problem is that using your emergency funds for things you could’ve prepared for is a sure way to deplete it. As a rule of thumb, emergency funds are for things you do not anticipate, like accidents and loss of income. Your monthly mortgage and insurance contributions don’t count because you’re well aware of when you’re due to pay them.

How about your savings fund, you say? It’s not advisable to interchange these two because sinking funds are more specific and less flexible. Setting up a sinking fund for your house’s down payment has a definite purpose and deadline, which discourages you from using this fund for other things.

In case you feel that some of your funds overlap, take the time to set conditions. Remember that it’s your money, and you get to decide how you want to manage it. Under what conditions do you classify a medical expense as an emergency fund or a sinking fund? What kinds of household repairs do you set up a sinking fund for? Different lifestyles call for a different set of conditions. The better you define yours, the better you’ll handle your funds.

How Should You Start?

It may sound intimidating, but it’s actually simpler than you think. Start by identifying the categories you want to save for. Apart from the aforementioned down payment and insurance, you might want to set aside money for repairs, furniture, and that security system you’ve always wanted. Their cost will vary depending on your needs and preferences, so it’s best to do thorough research beforehand. Canvas prices online and round up to ensure that you’re saving enough or more than enough for your goals.

Once you know how much each of these costs, determine the number of months you want to save for or before they are due. Divide the sum by the number of months, and you’ll get the amount that you’ll need to set aside regularly.

You can work on multiple sinking funds at once, or you can tick them off one after another. Always go for which one works for you and your finances. While setting aside certain sums monthly to achieve your goal may be difficult, always remember that it will ultimately lighten your load once you actually have to make the payment.

Where Should You Place Them?

The answer to this depends largely on your self-discipline and the options that are available to you. Ideally, your sinking funds will be in an account that you can’t easily access. The greater the effort you have to make to withdraw from it, the lesser the chances that you’ll mess up. This is the reason a lot of people prefer to put it in their checking accounts. Anywhere else put you at risk of sabotaging your efforts because it’s easy to justify an impulsive purchase when you really want it.

Some also create a separate savings account and refrain from enrolling them online. If you’re more comfortable with this idea, you may leave the corresponding debit cards at home, too, to further prevent irresponsible usage.

Pay Now, Enjoy Later

Saving money may be empowering, but most of the time, it’s not fun. You wish you can spend that money on new apparel, appliances, and even some delicious food. Whenever you’re tempted to stray from your plans, bear in mind that your little “suffering” now will pay dividends in the future. You certainly won’t regret it once you experience the joy of spending in cash rather than in credit.