Specific short-term savings, sometimes called sinking funds, can change your financial life. We often talk about the big three first steps in a financial plan: emergency funds, paying down debt, and saving and/or investing. They’re all important. But once you’ve moved past the urgency of past-due bills and nothing in the bank, you’re ready for the next step in your financial journey: short-term savings.
Creating separate savings for “not-emergency” expenses is the single thing that made the biggest change in my financial life. It will change your life, too.
Short-term savings are money that you’ve put aside for spending that you know is going to happen in the near-ish future. How you define near-ish is up to you, but generally we’re looking at anywhere between next month and a couple of years. The idea is that when the expense happens, you have the money ready and waiting to be spent. This is so much better than wondering how you’ll pay for new tennis shoes or new technology or new tires.
What Kinds of Short-Term Savings Should I Have?
If you can reasonably guess that you’ll need to spend it in the next year or three, it makes sense to have a sinking fund. You probably can’t fund them all at once, so pick the ones that are the biggest, or the most likely to happen. Or just pick. Every step is a good step.
Here are some ideas to get you started, in no particular order:
- Christmas costs
- permanent change of station/moving expenses
- new phones/computers
- back-to-school costs
- utilities if they vary a lot across the year
- health care expenses
- clothes and shoes
- personal property taxes
- vehicle repairs
- kids’ activities
- charitable giving
- Swim club membership
- pets/pet expenses
- musical instruments
- anything you pay annually
- school expenses
- house down payment
- promotion party
- new car
- summer camp
- gaming equipment
How Much Do I Save?
Ah, this is a tricky question. In a perfect world, you have enough money to fill up every single category. But honestly, if you had that much money, you might not be worried about short-term savings at all.
In the real world, how much you’ll save depends on what kind of expenses you’re saving for. Is it a one-time thing, like a wedding, or an ongoing but variable expense like uniforms? For variable expenses, guesstimate how much you will spend in a year, and divide by 12. Each month, move that much money into that account. For one-time expenses, divide the amount of money you’ll need by the number of months until the expense occurs.
Where Do I Keep My Short-Term Savings?
The best place to keep your short-term savings is going to depend on your personal habits and your ability to keep your money straight.
When I was younger, and money was tight, I kept my special savings in an entirely different bank. The closest branch was across town, and this was before internet banking. If I wanted access to my money, I had to physically drive to the bank, when they were open, and go into the branch. Now that I’m a little more disciplined, I keep it in my regular credit union. You do what works best for you!
How Do I Organize My Short-Term Savings?
There are a couple of different methods for organizing your short-term savings. I think I’ve tried them all. We’ve done cash in physical envelopes. I’ve tracked one bank account into multiple sub-accounts with a paper ledger. We’ve used a spreadsheet to track sub-funds within an account. Now I use actually different savings accounts…thank you, Navy Federal. It’s slightly crazy to have 10 bank accounts, but it works for me!
What Happens When An Account Doesn’t Have Enough Money For An Expense?
When you’re first getting started, this is going to happen occasionally. It’s OK. When you don’t have enough money to pay for an expense that is supposed to come out of your short-term savings, then you need to backtrack just a little. How would you have paid for that expenses before you started using short-term savings? What’s the best of your available options? Can you borrow, temporarily, from another account? Or cut back on a regular expense this month? If it’s really important, you might want a short-term loan from your branch’s relief society or maybe even put it on a credit card. Deal with this little setback, and then keep moving forward.
Creating and funding these short-term savings accounts will truly change your financial life. With the savings already allocated, it’s no big deal when your car needs new brakes, or your son needs new baseball cleats. If you’ve already conquered emergency funds and paying off debt, make this your next step!
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