Tag: savings

 

What is a Sinking Fund and Why do You Need it?

When I first started budgeting, sticking to my monthly spending amount was tough. 

I’d start the month thinking I had a great budget and would only spend a certain amount. But by mid-month, I’d fall off track. Car insurance was due! I needed to buy a birthday gift for my Mom! Things that I needed to pay for were constantly catching me by surprise. As a result, I’d blow my budget more often than not. 

The frustrating part was that I had failed to plan for known expenses.

After my many failed budgeting attempts, I heard about a sinking fund, a type of savings account that you use to set aside money to save for something in the future. I immediately began using a sinking fund for a couple of things, and eventually began using it to automatically save for just about everything.

Not only has a sinking fund helped me stop blowing through my budget each month, but it’s also helped me become more thoughtful and proactive with how I spend and save my money. 

What is a sinking fund?

A sinking fund lets you set aside a little bit of money each month to help prepare you for an expense. Sinking funds can be used for things like: Christmas presents, travel, a new car, or an irregular bill.

Some examples of uses for sinking funds:

  • Attending weddings
  • Buying a new car
  • Paying insurance bills
  • Making property tax payments

When you’re transferring a little bit of money into a sinking account monthly, you’re prepared for times when you have to make the bigger cash outlays. 

Why is a sinking fund important?

No matter how well you plan out your monthly expenses, if you’re not factoring in known, irregular expenses, you’ll be totally unprepared when you’ve got to come up with the cash. This can leave you reaching for your credit card every year at Christmas and starting off the New Year in debt. The average American racks up over $1,000 in debt during the holidays

But what if you were able to set aside $50, $75, or $100 each month to save for the holidays? You’re now suddenly much more in control of your spending and not risking your financial health to buy presents. 

Aside from helping you prepare for things like excess holiday spending, a sinking fund can help you dream big when it comes to your money goals. Want to buy a new car and pay cash? Want to take your family on a special and memorable summer vacation? A sinking fund can help you do these things. 

Sinking fund vs emergency fund: what’s the difference?

If you put money into an emergency fund, you might wonder if that’s really different than setting aside money in a sinking fund account. Yes, it is! Money in an emergency fund is to be used for emergencies only — like your car breaking down or losing your job. It’s a bad habit to withdraw money from your emergency fund for non-emergencies. When a real emergency strikes, you’ll be happy to have that cash set aside. 

Money in a sinking fund is used for known expenses like car insurance, vacations, or holiday gifts. You can spend that money without worry or guilt because you’ve planned and saved for it. 

Sinking fund examples

How does this actually work? Let’s say you have three things that you’ve decided to save for with a sinking fund: car insurance, Christmas gifts, and summer vacation. 

For each expense, list out how much it will cost and when you’ll need the money:

  • Car insurance: $600 bill due in six months
  • Christmas gifts: $750 saved in three months
  • Summer vacation: $1,200 saved in 10 months

Next, break each expense into the monthly amount you need to save:

  • Car insurance: $100 per month
  • Christmas gifts: $250 per month
  • Summer vacation: $120 per month

Once you have that calculated, include those expenses in your monthly budget and set up a monthly automatic transfer to your sinking fund. 

How to create your own sinking fund

You’re hopefully now sold on how great a sinking fund is. And it gets even better because it’s easy to start your own sinking fund. Here are the steps you’ll want to take:

  • Open a bank account specifically for your sinking fund. You’ll want to keep this money separate from your other accounts so you know exactly how much you have available to spend. 
  • Make a list of all the things you want and need to save for, as well as how much they cost. Think about things you have to pay for (taxes, insurance) and the things you’re excited to spend money on (vacations, a new car, holiday spending).
  • For each item, figure out the date when you’ll need the money. 
  • Calculate how much you need to save each month to have enough saved by the time you need it.
  • Set up monthly automatic transfers to move money into your sinking fund account. And yes, you really do need to make these transfers automatic

Are you ready to start a sinking fund? 

If you find yourself constantly unprepared when irregular expenses pop up and reaching for your credit card, it’s time to start a sinking fund. 

While it’s a little extra work up front to set up your transfers, it’s worth it in the long run. To start your sinking fund, check out the Chime app that makes mobile banking easier.  And you can use the automatic savings feature to reach your sinking fund goals even faster.

Now that you know how to get started, what are you excited to save for? 

 

 

How to Save Money from Your Salary

Saving money may be at the top of your financial to-do list. 

The challenge is figuring out how to save money from salary while covering your basic living expenses, paying down debt or working toward other financial goals. 

If you’re looking for tips on how to save money, you’re in the right place. Take a look at 6 strategies that can help you save money from your salary paycheck.

1. Break your paychecks down

First things first, go over your paycheck to see how much take-home pay you have to work with. Your take-home is what’s left after your employer takes out taxes, insurance and any other deductions, like 401(k) plan contributions from your salary. 

Speaking of 401(k) contributions, an easy way to boost savings is to notch up your contribution rate. 

If you’re wondering how much to save monthly, there’s a simple rule you can follow. At the very least, it’s good to save enough of your salary to get the full employee match into your retirement plan if your employer offers one. 

So, as you’re looking over your paycheck, figure out what your current contribution rate is and see whether you can bump that up by a percentage or two. Even a fractional increase can make a difference in how much you’re able to save long-term. This paycheck impact calculator can help you gauge how your take-home pay would be affected by upping your 401(k) savings rate. 

2. Find money in your paycheck to save

If you’ve been struggling to save so far, this is where you’ll need to dig into your budget to see where you may be able to free up extra cash. 

“When it comes to saving money from a paycheck as a salary employee, it all comes down to keeping a good budget,” says David Pipp, founder of finance blog Living Low Key

“If you have money to cover your cost of living and a little money for fun, everything after that should go towards savings.”

For example, one of your biggest budget expenses may be food. If you’re dining out a lot, you could look for money-saving hacks to cut down on the cost. Or, eliminate some meals out and eat more often at home. 

Here are some helpful tips for how to save money on groceries:

  • Plan meals for the week, based on what’s on sale. 
  • Create menus that are designed to minimize food waste.
  • Shop with a list and stick to the list.
  • Consider using your grocery store’s pickup service if it’s free to avoid making impulse buys. 
  • Use coupons and cash back apps to earn cash rewards or discounts on groceries.
  • Check for bargains at your local farmer’s market if you have one. 

Other expenses you may want to downsize include utility bills or subscription services you don’t use. You could also find savings in your budget by switching to a bank account with no fees

3. Make your debt payments less expensive

Consider how you can make your debt payments less expensive. Refinancing student loans, for example, can help you get a lower rate. This can also lower your monthly payment, giving you more money in your budget to save. The same is true for transferring high-interest credit card debt to a new card with a 0% introductory promotional rate. 

4. Make more money than your salary paycheck

If you’re falling short of your savings goal, maybe it’s time to earn more.

“There are two ways to save more money: earn more or spend less,” says Ben Watson, CPA and personal finance expert at DollarSprout.

“The best way is to do both at the same time: take on extra hours, start a side hustle, mow lawns or go crazy selling unused items on Facebook marketplace while taking a hard look at your budget to see what you’ve been wasting money on,” says Watson.

5. Automate savings from your salary paycheck 

Once you know how much you need to cover your bills and expenses, you can set money aside from your paycheck to put toward your savings.  

There are two simple, yet highly effective ways to do this:

  • Set up direct deposit into your savings account from your paycheck. This way, the money goes straight to savings every payday. 
  • If your employer doesn’t offer direct deposit, you can set up an automatic savings transfer from checking to savings each time you’re paid. You just choose the amount to save and the frequency you want money transferred and you’re done. 

These two savings hacks can also be a great way to build your emergency savings fund or add money to savings for a long-term goal, like a down payment on a home. 

6. Consistency can be your ace in the hole for growing your money 

Here’s how this works. You figure out what you need (or want) to save each month. Instead of putting it into the bank right away, you keep it in cash at home. You do this for a month or two to see if you ever have to dip into your savings for any reason. After that, move the cash to a bank account

If you’re totally new to the saving habit, considering giving this strategy a test run, says Eric Holland, founder of family finance blog High Five Dad

“If you had to dip into savings, evaluate the reasons why,” Holland says. 

For example, it might be due to poor planning or an emergency. Trying this little experiment can help you decide if there are any changes you need to make to your savings strategy. 

How much should you save each month?

That’s a great question and it’s an important one to ask if you’re hoping to stretch your salary paycheck as far as possible. 

The answer for how much to save monthly ultimately comes down to how much you’re taking home, what your expenses are and how much, if anything, you’re paying toward debt. 

But if you’re looking for some specific numbers to work from, the 50/30/20 rule is a good place to start. 

The 50/30/20 rule advocates putting 50% of your income toward your essential expenses each month, spending 30% and then saving the remaining 20%. You can do the math on your own or run the numbers through a simple calculator.

Here’s an example of what that might look like based on the median millennial salary of $69,000:

  • Biweekly paycheck amount: $2,653.85
  • 50% allocation to essential expenses: $1,326.93
  • 30% allocation to discretionary spending: $796.16
  • 20% allocation to savings: $531
Learn more about the 50/30/20 rule here

 

Using these numbers, you should be putting $531 away into savings every two weeks. Over a year, that adds up to $13,800. 

That number can include the 401(k) plan contributions mentioned earlier if you have an employer plan. So, let’s say you contribute 6% of your salary to your 401(k). Your employer matches 50% of your contribution. This means $6,210 is going into your plan each year, based on the $69,000 

median salary number mentioned earlier.

If you’re basing your savings on biweekly salary paychecks, you’d have to save $291.92 every payday after your retirement contributions are taken out to hit the 20% total savings target

The next step is to make sure you actually have that amount of money in your budget to save. 

Are you ready to save from your salary?

Have you established a regular savings habit yet? If not, there’s no time like the present. 

And as you start saving, remember to give those dollars a job. Having a clear financial goal or purpose in mind for the money you save can help motivate you to stay the course. 

 

5 Ways to Save Money in an Expensive City

Saving money is already a challenge, but it gets even more complicated when you live in an expensive city. 

I recently moved to California from the Midwest. To say I’ve experienced quite a bit of sticker shock is an understatement.  

While cities like Los Angeles, San Francisco, and New York City come with diverse cultures, endless entertainment, and amazing food, they also come with a hefty price tag. The good news is, you don’t have to sacrifice your bank account to live in the city of your dreams. 

Here’s how to save money when you live in an expensive city:

1. Sell Unwanted Items

We all have odds and ends around the house that we really never use. Rather than cluttering up space with a bunch of useless things, take a couple hours over a weekend to filter through it all. Then, sell the things you won’t miss.

For electronics, furniture, clothes, and everything in between, you can use apps like Letgo, OfferUp, or even Facebook Marketplace to list what you want to sell. Not only will you earn some extra cash but you’ll breathe easier now that you’ve freed up some room in your overflowing closet and other storage spaces.  

2. Use Money Saving Apps 

As you know, there’s an app for almost everything, and that includes those that help you save money and stay on track with your budget. The great thing about apps is that they do a lot of the heavy lifting for you. 

This is especially helpful when you’re living in a big city as you probably spend a lot of time rushing around, commuting, and running errands. Apps, however, can keep you organized and give you the ability to easily check in on your bank accounts while you’re on the go. Whether your goal is to save money, stick to your budget, or make sure you don’t forget to pay your bills, apps help you get it all done without taking too much time out of your busy schedule.

3. House or Pet-Sit for Friends 

Another perk of living in a popular city is that you probably have cool friends with busy lives just like you. It’s a perk because when their busy lives require them to go out of town for several days, you’re probably on their list of people to hit up for a house-sitting or pet-sitting gig. 

There are a lot of pros to this. Not only do you get a mini staycation, but you can spend some time with an adorable pet and make a few extra bucks. If your friend has a fully stocked fridge that you have access to, you’ve really hit the jackpot.

4. Recycle (Seriously)

Of the many things I had to adjust to when moving to California, one of them was paying an extra fee when buying beverages in plastic bottles or cans. The flip-side of that is that I can take those plastic bottles and cans to my local recycling center and get some money back.  

If you tend to chuck your empty bottles and cans into the nearest trash bin, you might want to rethink this. It only takes a couple seconds to set them aside for recycling, and just an hour or so to drop them off at a recycling center every few months. 

No, you won’t get rich from turning in recycled items, but when you’re trying to figure out how to save money, every little bit helps. Plus, you’re doing your part to make the environment better so it’s a win-win situation!

5. Rent Out Your Car or Bike

You might hear a lot about renting out a spare room in your apartment for extra cash, but if you’re a renter yourself, this might not be the best idea. Why? Because if your lease doesn’t allow subletting and your landlord finds out, you could be in big trouble. Making extra money is definitely not worth the risk of getting evicted or other legal consequences.

Still, if you can’t rent out your living space, all is not lost. With the “sharing economy” steadily expanding, there are quite a few other ways to make money.

Car sharing platforms like Turo, for example, give you the opportunity to rent your car to nearby drivers and earn anywhere from 65% to 85% of the total trip price. To give you peace of mind, the service also comes with insurance and allows you to meet the driver and check their credentials before handing over the keys.  

If you want to be extra economical (to go along with your newfound recycling habits), you can rent out your bike, snowboard, or surfboard on Spinlister. Like car sharing services, insurance coverage is included, plus you have the flexibility of setting your own rental pricing.

Finally, Enjoy Yourself

Yes, it’s expensive to live in some cities, but you live in your chosen city for a reason, right? 

The last thing you want to do is spend most of your time complaining about how much everything costs. So, use this guide for inspiration. Find a few money saving tricks, set them in place, and focus your energy on enjoying all your city has to offer. 

 

 

A Guide on How to Budget on A Variable Income

There are a lot of perks that come with freelancing, but a stable, regular paycheck isn’t one of them. 

During my first year as a freelancer, I dealt with an inconsistent income roller-coaster: One month I’d stress about late client payments (and making rent), while the next month I’d find myself flush with cash. 

Indeed, when you don’t know how much you’ll make or when you’ll get paid in a given month, it’s difficult to get ahead financially. Currently, 20% of the workforce is freelance and that number is projected to rise to 50% within the next decade. And freelancers aren’t the only ones dealing with an inconsistent income. If you’re paid on commission or earn the lion’s share of your income on tips, you may be dealing with this roller-coaster as well.  

For me, I had to implement a budgeting system that helped me pay bills and save money for my financial goals. I found a system that works for me, and it can work for you, too. Read on to learn more about my tried-and-true budgeting system for an inconsistent income. 

How this budgeting system works — an overview

While your income may be irregular, most of your bills are not. Plus, one month you may live large because a client finally paid you while another month you can barely cover rent because things have been slow. 

To break this feast or famine cycle I nailed one goal: I pay myself first with a steady, consistent paycheck. Regardless of how much I earn each month, I still get paid the same amount. 

So, let’s say you’ve decided that your monthly paycheck needs to be $5,000. One month has been stellar, and after setting aside money for taxes, you’ve earned $7,500. Rather than spending that $7,500, you pay yourself $5,000. 

The next month has been a little rough and after taxes, you’ve only earned $3,500. You can still pay yourself first with a regular paycheck. See how that works?

While it may be a bummer to not spend a little extra during months when you earn a lot, you’ll be thankful that you didn’t blow your cash when a slow month rolls around. 

Steps to implement this system

The pay yourself first concept is pretty straight-forward. But, with any budgeting system, there are a few key steps you’ll want to take to implement this. 

Step 1: Calculate your budget

The first step is to figure out what your monthly paycheck will be. If you don’t have a budget already, start by listing all of your necessities. These are the things that you absolutely must be able to pay for each month, regardless of how much or how little you make. For example: 

  • How much do you spend on things like housing, transportation, utilities, groceries, and health insurance premiums? 
  • How much do you transfer into savings each month for retirement and other goals?
  • What are your debt payments? 

Next, you’ll add your discretionary spending to your budget. This includes things like eating out, shopping, subscription services, and any extra travel. Discretionary spending is nice but you can also cut it out when things get really lean. 

Not sure what you spend? Take some time to look back through your past few months of credit card and bank statements to get a good estimate. 

Once you have everything listed, add it all together. This will tell give you a ballpark idea of your monthly budget and monthly paycheck amount. 

Step 2: Set up separate bank accounts

To keep this system organized, you’ll want to have a few separate bank accounts set up, including accounts for:

  • Work income (or business) 
  • Personal spending 
  • Savings 

It’s a good idea to deposit your work income into a checking account that is only used for your work expenses (no personal spending). If you’re self-employed you might want to consider using a business checking account. 

Each month your “paycheck” will be transferred from your work checking account to your personal checking account. You’ll pay all of your bills and do all of your personal spending with the money in this personal account. 

You’ll also want to have a separate savings account that you can pull from during your down months. Dave Ramsey calls this savings account a “hill and valley fund”. When you have an exceptionally good month, you can transfer money from your work checking account to this savings account. And during an exceptionally bad month, you can transfer money from this savings account to cover your full paycheck. 

Step 3: Adjust as needed

Just like with any other budget, you can make changes periodically and check to see whether this system is working. If you find that you haven’t given yourself enough of a paycheck to comfortably live, go back to step 1 and recalculate your budget. If you find yourself constantly needing to dip into your savings account to give yourself a paycheck and that account balance is getting dangerously low, you may need to cut back on some of your expenses or earn more money. 

Set yourself up for success

If you have an inconsistent income, don’t fret. You can still enjoy the benefits of flexible earnings with a budget that works. 

While it can take some time to set up this system and get used to paying yourself a consistent income, you’ll eventually breathe a little easier each month. Besides, it’ll be nice not to worry about paying your bills when things get a little slow. Are you ready to give it a try?

 

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