Feel Organized and Less Anxious About Money: The Sinking Fund System Explained

16:42Elizabeth Ayoola:Looking at your budget and knowing how much to allocate to each of your funds. And Sean, when I tell you I went down a rabbit hole, this was an all day project. Okay. Opening the accounts was easy. All day. Okay. Opening the accounts was the easy part. So I was like, well, maybe this is a good time to actually revise my budget. I started finding things that I don't need to be paying for anymore and cutting those off. I started logging into all my accounts. I started doing some comparison shopping. Hey, am I paying too much on electricity? I created a spreadsheet and included all of my bills and the links to all of the accounts and the passwords.

17:15Elizabeth Ayoola:Because part of those hours were taken trying to figure out my passwords for each account. Of course. Such a pain. I know. But in the end, I was able to see exactly what's happening with my money right now. I usually do a check in once a quarter, but hey, time and time to do it. And then see how much I have left over to allocate to each of these pots. It was such an annoying but satisfying. You couldn't tell me anything by the end of the day. That sounds eye-opening, though, because now you are so much more in control of your finances. You know exactly where every dollar is going. And for folks who maybe don't want to do a full deep dive like Elizabeth did, which can be helpful if you really need that refresh.

17:51We always go back to the 50-30-20 budget, right? Where 50 % of your income is covering needs, 30 % goes to wants, 20 % goes towards extra debt payments and savings. So you're going to tap that 20 % when you're thinking about what you're going to be putting into these different savings buckets. And there is no prescriptive way to do it, except again, you probably really should prioritize that emergency fund first and foremost before putting all the 20 % into your vacation fund. But it's subjective and up to you. And it takes a while to really find the right balance. I know when I first set the system up, I was tinkering with it almost every month just to get a feel for what seemed right.

18:30And now and again, I still change it just depending on where my goals are and what's a priority this month versus what was a priority six months ago.

18:37Elizabeth Ayoola:Thank you for saying that because I realized by the end of the day when I had tried to calculate all the percentages for each account, I was like, this doesn't have to be rigid. Let's see how it goes for the first couple of months and we can adjust, increase, decrease, create more accounts based on what we find. Yes. All right. We'll be back in a minute. Stay with us.

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21:31Elevate your summer wardrobe. Go to quince.com slash smart money for free shipping on your order and 365 day returns. Now available in Canada too. That's quince.com slash smart money for free shipping and 365 day returns. quince.com slash smart money. At this point you should have what your goals are, and you should know roughly how much money you could maybe put into each of them, either as a dollar amount or as a percentage of your paycheck. And then here's the key, setting up direct deposit. We are very fortunate to work at a company called NerdWallet, where we are allowed to have direct deposit from our paychecks into multiple accounts.

22:12And that is so helpful. And that's how I've been able to do this really seamlessly. Although I don't know if I've told you this, Elizabeth. One time I broke our company's system. Did I tell you about this?

22:22Elizabeth Ayoola:You did tell me and I'm going to be shocked again. What? Let me tell you how. Because when you set up all the different accounts that you can have on the back end and the percentage of your income that you want to go to each account, it said that you can have 10 accounts. And I thought, great, I've got 10 accounts. Let me set this whole thing up. And it turns out it actually at that time wasn't able to support 10. Eight was the correct number. And so after a bit of back and forth with HR and me actually not noticing for like a full month that I wasn't getting all my money, which was my bad, I sorted it out.

22:53And now I have kept it to just eight to keep things easy and to hopefully not over strain their system. But yeah, if you can set things up through your employer, that's probably going to be the easiest. But just double check. Do what I didn't do that one time. Make sure that all of your money is going exactly where it should be. And you can do that just by looking at your pay stub.

23:11Elizabeth Ayoola:And if you are not as lucky to have an employer that allows you to break the system as Sean did, then you may have to do a little bit more work on your end in terms of opening these accounts. And most accounts will allow you to do, I'm always saying direct debit, which is how British people say it, direct deposit. Yes, that's what we say in the States. Yeah, yeah. Straight from your account into that savings account. But something I will say is cash flow is important here. So if you're going to have it coming out on the 1st of the month, 15th of the month, make sure that you have enough money in there.

23:45Elizabeth Ayoola:Otherwise, you might find yourself in a bit of a mess. Yeah, I would like folks to give maybe a buffer of a day or two after you think when your paycheck is going to hit to have that money come out. So that way you don't end up overdrawing your account. And one big thing we haven't acknowledged here is that a lot of what we're talking about so far is actually best for people who have a really steady income and a predictable paycheck. for people who are maybe freelancers or get paid on a regular basis for whatever reason, you might not wanna have it as automated. You could maybe have a smaller amount automated of like 50 or$100 each two week period, whatever cadence works for you.

24:23But just make sure that you are going to have enough coming in to cover what sort of automatic deposit you have going out because you don't wanna get in the situation where you are pulling out too much from an account and then have to go back and correct everything because you just don't have enough cash in your checking account.

24:37Elizabeth Ayoola:That's it. And I think that's where starting slow is really important. And even if you're aspirational and want to have 10 like Sean, maybe you start with two, right? And then you build your way up. And once you have a good rhythm with your cash flow and with your automatic deposits, then you can build more. And that brings me to the next thing I want to talk about. Here is what you should not do with your sinking funds. One is set up too many too quickly because that can get really confusing and you might end up making accounts for things that you don't care about. Another one is not actually putting enough money in each account to make meaningful progress.

25:11Yes, we all want to be able to fund our vacations and buy a new car and have our emergency fund and have money allocated for home repairs. But if you can only put$25 into each account on a biweekly basis, you're not really going to be making a lot of progress on each of them. So I would say maybe consolidate, focus on the most important ones and try to get a little bit further ahead before you expand out to other goals.

25:32Elizabeth Ayoola:I feel a little slighted, Sean, and I know that was unintentional. One of my stinking funds, and also tell me what you think about this as the stinking fund expert. One of my sinking funds is for gifts. Is that a sinking fund or is that a savings account? Because I find every month I'm buying somebody gifts for their birthday. And again, where's the money coming from? So I am allocating money for that. But it's not a huge amount. It's like, I don't know,$50 a pay period, right? That's okay. Because maybe I'm giving a gift card this month or maybe it's, I don't know. You know what I mean? That goes back to knowing how much money you need in each account for each goal.

26:05So for my house fund, a rule of thumb is to say between 1 % and 3 % of your home's value each year for repairs. So over the course of an entire year, that's the amount that I'm putting into my home repair fund. For you, if you know that you're spending maybe$50,$100 a month on gifts for people, you really just need to have that amount in your sinking fund. And it's okay if it's revolving and you're not accruing this massive balance because you're deploying it as you need to. It just so happens to be that you're deploying it on a more regular basis than you would something like a vacation fund.

26:36That's okay.

26:37Elizabeth Ayoola:Okay, that's what I thought. Thank you, Mr. CFP. You're welcome. And thank you for reminding everyone that I am a certified financial planner professional. I'm proud of you. I must. I must. So, Elizabeth, does anything else come to mind for you about what not to do when setting up a sinking fund, having just set this up yourself? The main thing is credit cards. So I use my credit cards to pay for many things and I have to be mindful to pay off the balance with the money from the sinking fund. So that, again, I have a real idea of what I'm spending the money on and it's allocated properly just to make that mental connection versus spending and then, you know, forgetting that there's money allocated to pay for that thing.

27:17Yeah. So using the money in the account for its actual intended purpose.

27:22Elizabeth Ayoola:Exactly. Yes. Yeah, I get that. And that can be a challenge too, because sometimes I feel tempted to dip into what I have in my emergency fund if I've had like a really expensive month. And that's not actually an emergency. It's just me overspending and not listening to what I set my budget up to be. So I try not to do that as much as I can, but I get the appeal. It can be really tempting. It can be. But yeah, I would say my biggest friction point has been now I can see where all my money is in each bucket, you know? So it's like, oh, I want to buy XYZ. Well, what bucket is it coming out of Elizabeth?

28:00Elizabeth Ayoola:Oh, well, you don't have any more in your fund money bucket. And you can't take it from the travel bucket or the gift bucket or the emergency fund because it ain't an emergency. So I guess you got to wait till next month. I'd say that friction is kind of the point, right? You want to have these guardrails so that you aren't overspending in a certain category and you are saving as much as you really want to and need to in these other categories. Yeah, that's it. Okay. Well, let's go a little deeper into each of our own sinking fund setup. You really just set this up for yourself quite recently.

28:29So can you talk about what your various savings accounts are?

28:32Elizabeth Ayoola:So at the moment, I have a travel fund because I'm always traveling at some point during the year. And also I realized I have not been accounting for the child care that I have to pay for when I travel by myself. And that's usually a scramble like, oh, I paid for the trip, but now I have to pay extra five, six, seven hundred dollars for the babysitter. And then I'm just pulling it from, I don't know, the air. So I have my travel fund. I have my gift fund, as I just mentioned, because I noticed when I was going through my budget, I'm like, what's a recurring expense that maybe doesn't have to do with bills?

29:02Elizabeth Ayoola:And I'm always, you know, it's a kid's birthday, friend's birthday, partner's birthday, whoever. So set up a gift fund. And this we established is not exactly a stinking fund, but it still has been nice to set money aside from it. You know, I opened up a flexible spending account. So I have money that goes straight from my paycheck into there for summer camp and other holidays where I need child care. Those right now are my main buckets. I started off small. It's working for me. I have a quote unquote fun money account, but that is just a checking account. And I get actually cash back rewards on that account.

29:33Elizabeth Ayoola:So I decided, hey, I should maximize that and actually use it while I'm spending on my frivolous things. Those are the main ones I have. And your emergency fund is in your high-eld savings account as well, right? That's right. That's right. Yeah. Nice. But I've had that for ages. So yeah. Did you decide to go with the same bank that you'd been using or did you shop around at all in this process? Well, as a gal who learns from her co-host, we had a discussion about sinking funds not so long ago on the show. And I know you mentioned that you keep all of your sinking funds with the same organization to make it easier for you.

30:07Elizabeth Ayoola:And I was like, hey, I like easy. I'm going to do that, too. I recently moved my emergency fund to a new high yield savings account. So I just decided to open all my sinking funds with the same provider. So now when I open my app, I can see all of my savings accounts in one place. And it's just so easy. I think that's really smart because these sinking funds can get a little complex when you have, you know, half a dozen savings accounts. But if they're all with the same institution, you just open the app on your phone or log in and then you see them right there in front of you. So it's really not all that complicated to track versus if you did have them across two or three different banks, that could get confusing.

30:44And as we all know, the administrative burden of managing money is so cumbersome sometimes that you want to disengage. Like you said earlier, Elizabeth, just knowing your password can be a huge barrier and it'll make you just want to walk away from the task and say, I'll do that later. And then it turns out you don't do it later. So try to keep it as simple as you can amid the slight complexity of having multiple accounts.

31:05Elizabeth Ayoola:Yeah. Well, I know you said that you did this ages ago. Well, I guess I already gave you away. But yeah. So your process is what? Let's dive into yours, Sean. Okay, I'm going to pull up my savings account right now because honestly, it's hard to keep track of how many I have at any given moment, but I haven't changed them in a minute. So I'm going to guess, actually, I want you to guess how many I have right now. Well, you said 10, and because you're extra, maybe it's 11. Okay. Across all of my checking and savings accounts, it's closer to 10 or 11. But right now with my savings accounts, I have seven.

31:47Elizabeth Ayoola:Oh, okay. I have seven. And one of them is my wedding fund that I just haven't closed yet. So in practice, I really have six that I'm using on a regular basis. But then beyond that, yeah, I do have a checking account. I have a personal checking account. I have a business checking account. I have an old checking account that I've had since high school. So, you know, it gets a little bit closer to that 10-ish number, but a lot of them I'm not engaging with on a super regular basis and that's fine. And how did you do the math deciding how much to put into each account from your paycheck? Because I imagine that is where some people may get a little stressed out.

32:21Well, like you, when I first set it up, I did a bit of a deep dive. I don't think I went as far as you did, although I love that this could be a moment for people to get way more acquainted with their finances, I just knew to start that I really needed to build up my emergency savings. And right now I'm actually at a place where I have plenty in that account. So I've stopped contributing to it. So I'm just earning interest that's continuing to grow the balance. But at a certain point, you don't always need to be adding to your emergency fund. So at that point, I did other things like, okay, like I said before, I'm putting in between one and 3 % of my home's value into my house fund.

32:58And then some of the other amounts were a little arbitrary. Like I want at least$100 going into my car fund because I think that over time that will get me to a place where I can cover at least annual repairs. And if gas is really expensive one month, I mean, gas is wildly expensive right now. But if I'm driving a lot a certain month and I have a higher bill than usual, I might dip into that just to help me feel better about myself. It's kind of an intuitive process. And I think if I don't have a specific number that I'm saving for, like if I have a vacation coming up in six months where I need to save a few thousand dollars for international travel and hotels and all of that, if I don't have a big concrete financial number in mind, then it can be a little bit loosey-goosey.

33:40I just like to have enough going in there that's covering my day-to-day expenses.

33:45Elizabeth Ayoola:When you just said that you stopped putting money in your emergency fund and now you can put that towards house repairs or you're putting more money towards house repairs, that's actually the part I'm really looking forward to. So as you know, I'm going to be paying off my car this year. And as I was doing the school run this morning in the car, I was thinking, wow, what do I want to put that$500 towards? Which fund can that go towards? Either my emergency fund, my travel fund, but it is really fun when you're able to tick off a goal and then you have more money to put somewhere else. You know what I did when I paid off my car?

34:14I put the amount that I was paying on my car note each month and I decided to allocate that amount. It was like$350 into my car fund.

34:25Elizabeth Ayoola:Oh, that's smart. That way you're actually saving for your next car and repairs that pop up in the interim. Why would you even talk about a next car? Do you think I want to think about spending thousands of dollars again? Me either, but you know it's going to happen eventually, right? So you might as well get ahead of it. We'll talk about that in another episode, like what kind of car I want next. But anyway, that's in the far future. Yeah. I want an electric vehicle, but my car is still under 100 ,000 miles. and I want to have it for at least another five years. So I'm in no rush and I'll just keep putting my money into my house savings account and gradually build it up and buy a new car when I need to.

34:58Elizabeth Ayoola:But isn't that exciting to have such a long horizon in the sense that five years from now, if you're diligently saving, buying a car won't be so financially stressful because you have this big pot of money. Yeah, but speaking of the time horizon, some people might say, oh, why don't you just invest if you have five years? True. That's kind of on the borderline of when people might say you could ride out some ups and downs of the stock market. when it comes to this, I'm just risk averse. So I want to have it liquid to also cover things like car repairs or whatever else might come up in the meantime.

35:29So that's why I keep it all in my high-yield savings account.

35:31Elizabeth Ayoola:I would do the same. I think that that is kind of the long and the short of it, maybe just the long of it, because we went so deep into how we set up our systems here. If anyone out there has set up their own sinking fund system, I'd love to hear how you did it, what you are saving for, what hiccups you run into, anything that we've just talked about here. I always love to hear what our listeners and viewers are up to. Well, that's all we have for this episode. Remember that we are here to answer your money questions, so send them to us. You can hit us up on the Nerd Hotline by texting us or leaving a voicemail at 901-730-6373.

36:02It's 901-730-NERD. You can also email us at podcast at nerdvolve.com or drop us a comment on Spotify or YouTube.

36:10Elizabeth Ayoola:Come hang out with us next time. We're going through a big career change. Until then, follow Smart Money on your favorite podcast app, that's Spotify, Apple Podcasts, and also iHeartRadio to automatically download new episodes. Here's our brief disclaimer. We are not your financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. This episode was produced by Tess Vigland, Hillary Georgie helped with editing, Eve Krogman edits our audio and also our video, and a big thank you to NerdWallet's editors for their help.

36:46And with that said, until next time, turn to the nerds.

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