How I used sinking funds to buy Gifts without killing the budget

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It’s that time of the year and while Ryan and I don’t have a huge family or lots of friends, we still have a good amount of gifts to buy during this time of the year. Mostly because our parents birthdays also fall in the vicinity of the holidays.

In the last few years, we’ve left Christmas shopping for the last minute. Last year, we were literally shopping on Christmas Eve and wrapping gifts 30 minutes before family reunion. This year we bought everything the first week of November. What changed? We had a holiday sinking fund made it all less overwhelming.

A sinking fund is basically money set aside for specific purpose. This could be set money aside for a future vacation, gifts, new car, etc.

On a monthly basis, Ryan and I set aside $100 towards our Gift Sinking Fund. Whenever it’s time for buying gifts, we just reimburse ourselves for purchases using the money in our gifting savings fund. This allows for consistency in our monthly spending avoiding big swings on our monthly budget.

This was our first year trying the sinking fund strategy, so it was not perfect. We probably should have put a little bit more aside to account for Christmas decorations, holiday dinners and now that we live out of state, travel expenses to visit family during the holidays.

In order to properly budget for next year, I am tracking how much I spend on gifts, holiday dinners, vacations and decorations so that starting January 1st, we start setting aside the right amount on a monthly basis.

Having a sinking fund makes spending more fun since I can spend without worrying about whether we will have the money available to cover these purchases. We just have to incorporate it into our monthly budget as with any other expense. Then, the money it’s automatically transferred into our savings account which is in a completely separate bank from our day to day spending account. It’s a set and forget type of “expense”.

We use Ally Savings account for this purpose and we love it. They have Saving Buckets, so you can keep track of several saving categories, similar to the envelope method. We personally have a few categories setup: Emergency Fund, Car Insurance, Vacation, Gifts, and Future Bills. I setup monthly transfers to be allocated to the corresponding category. It was supposed to be a high yield savings account, but with the interest rate decreases that took place this year, it is not earning as much anymore.

What are your thoughts on Sinking Funds? Yay or Nay?

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