Tariff Uncertainty After Supreme Court Decision and Budgeting With Sinking Funds

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17:55Sean Pyles:We're back and answering your money questions to help you make smarter financial decisions. This episode's question comes from John, who sent us a text. Hello, my name is John, and I'm currently trying to save up to a three-month emergency fund. I plan to eventually contribute about 15 % of my income toward my company 401k. At the same time, though, I want to invest money monthly into sinking funds for things like a new car, vacations, etc. What is a good percentage of my income to put toward these sinking funds after I'm investing 15 % into my 401k?

18:27Elizabeth Ayoola:Now, this episode, Sean and myself are going to take on John's question on our own. Yes, we are. All right, let's dive in, Sean. Let's start by talking about what a sinking fund is. You know, I was talking to my partner about sinking funds, and he's like, what's a sinking fund? So not everyone knows what a sinking fund is.

18:43Sean Pyles:We are big fans of sinking funds, also called savings buckets. but it's essentially having a different account for a different saving purpose. So I have a number of them and we'll get into the details of that in a minute, but it's great to have different goals allocated in these accounts. So like John said, they want to buy a new car. They want to go on vacations. It can be really nice to allocate certain amounts of money into these different accounts each month from your paycheck. So you're now making progress on different goals at the same time without having some big kind of nebulous wad of cash in a savings account.

19:15Sean Pyles:That's just for these different goals?

19:17Elizabeth Ayoola:I feel like you're throwing me shade. I feel like you're being shady because I have disclosed. You are because I have disclosed in the past that I had a big wad of cash and I would just randomly pull from it. And yes, it was a little messy.

19:30Sean Pyles:However, you've since come around to the sinking fund mindset, which we will get into in a moment. I don't want to spoil that, but I'm excited to hear how they're going for you. And something to think about too, the sinking funds is that it's essentially a form of mental accounting. And sometimes people describe mental accounting, which is really just when you prescribe different pots of money, different values as something that can be almost detrimental to your finances, because at the end of the day, a dollar is a dollar, no matter what account you have it in. But again, I really actually like doing this because it's a really helpful trick for you managing your money.

20:03Sean Pyles:And a lot of personal financial management is setting up little tricks for yourself so you can accomplish your goals with the resources that you have.

20:11Elizabeth Ayoola:Yeah. And I think for people who struggle with organization or who just like their financial goals to be more visible, sinking funds can be helpful because you can literally see money for each goal in a separate pot and you know where everything is going.

20:24Sean Pyles:Yes. And some banks, depending on which one you're using, will allow you to name the fund that you have. So in my high yield savings account, I have various ones and they're all labeled. So I know exactly what's going where no need to track what the account number is.

20:37Elizabeth Ayoola:Yeah. And speaking of high yield savings accounts, that is a easy plug for you guys. If you do want to create a sinking fund, putting one in a high yield savings account can be very helpful. Why? Because you get lots of interest. Well, lots is relative, but you get interest on the money that you're saving.

20:52Sean Pyles:Yeah. And that brings me to a key word in John's question is that they said they want to invest money monthly into sinking funds. I will put my money in my sinking funds into a high yield savings account, which isn't necessarily investing. It's just saving. But this comes down to a matter of your time horizon, too. I think if John has a longer term goal, if they know they don't need a car right now, but they might in five to seven years, in that case, they might actually want to invest this money in a sinking investment fund for this purpose. Generally, a good rule of thumb is that if you don't need money within five years, then you might want to keep it invested because you can get generally a better return.

21:33Sean Pyles:We never know what the market is going to do, but that's just often the case. But if you need your money in five years or less, in that case, you probably want to keep it in a high yield savings account. One thing I run into a lot when I talk about sinking funds is that people think that this is a really complicated strategy because at certain points in my life, I've had around 10 different accounts and people say that is bananas. Yeah. How do you keep track of all these accounts? Well, it's actually super, super easy. You basically make a sub account for each purpose and you label it according to whatever the goal is.

22:02Sean Pyles:And for me, the The real secret to success is direct automated deposits from each paycheck. So in the back end of my paycheck at NerdWallet, I can allocate, I want 5 % to go towards this account or 2 % to go toward that account, adding up to 100 % of my paycheck, obviously. And that way, my savings are going into these places, and I'm not really thinking about it. When you first set this up, you're going to want to double check that your payment processor is actually doing this properly. I have run into issues with that in the past. However, once you're confident that the direct deposits are working properly, just sit back and relax and watch your money grow.

22:38Elizabeth Ayoola:I have a follow-up question for you, Sean, the sinking fund expert here. Do you have all of your sinking funds with one provider or do you have multiple accounts across multiple banks?

22:50Sean Pyles:I guess the answer is yes to both questions, because I primarily bank with one online bank, and I have all of my sub accounts there, all my sinking funds there. But I just opened a couple other accounts with a new online bank that has more ethically aligned practices for what I want my bank to do. I have yet to actually migrate everything over to this new bank. I'm planning on doing that sometime soon after I file my taxes, maybe it's on my to do list. So eventually I will have everything over to this new bank. I'll close out my old bank. And because I just want to keep it all within one bank's ecosystem, navigating different accounts across different banks just sounds too confusing for me.

23:29Elizabeth Ayoola:Absolutely. And that's what I wanted to pull out there, because if any of the listeners out there are like me, I do not like managing multiple banks at once. And that can be an impediment to you starting a sinking fund in the first place. If you feel like you have to open multiple accounts at multiple banks. Yeah.

23:44Sean Pyles:But that said, my general checking account is a local credit union in the Portland area. That's different from the bank that I use for my sinking funds because that's an online high-ehold savings account. So I think it's okay to have a couple of different accounts. I actually, I guess, technically bank with four banks because I have a small account that is connected to my mom so that she can get my portion of the cell phone bill. I've had this account open since high school. I've talked about it probably a million times on this podcast before. And I just keep it open because I'm lazy and that's how I send my mom money each month.

24:16Sean Pyles:But yeah, for day-to-day banking, I really just use two accounts.

24:20Elizabeth Ayoola:Yeah. So I would not recommend, but suggest that people do what creates the most ease because that's what financial management is about. The more complicated it is, the harder it is to keep up with it and to stick with it.

24:30Sean Pyles:Yeah. Another question I get when I talk about sinking funds is how to find the right account for you. So Elizabeth, how did you find the bank that you are currently using?

24:40Elizabeth Ayoola:I'm pretty straightforward. So I go where the money resides. And that means I'm going for whoever has the highest interest rate. So I want the best return on my money. And that's essentially how I pick. But yes, this is a cheeky plug, but it's honest. I use NerdWallet because we have articles that tell us who has the best rates. I also do think about when I'm looking for a bank ease. So I like to make sure that customer service is easy to reach in case I need any help and that they're accessible. I'm not a big app person. So I know some people are like, oh, I won't use this bank if I don't like the app experience, but I'm just pretty simple.

25:11Elizabeth Ayoola:So ensure that I can easily get help and that you have a good rate. Those are my two top things.

25:16Sean Pyles:I'm similar to you. I want a good rate. I also rely heavily on NerdWallets Roundups. I was actually shopping around toward the end of last year after we had a couple interest rate cuts. And the bank that I have been using for years and years was more aggressively cutting the yield that they were giving people on their high-end savings accounts, which didn't make me too happy. So I found this other bank that, again, was more aligned with my values, my ethics, and they had a better yield, which is ultimately, at the end of the day, kind of what you want your money to do is get a better return for you.

25:45Elizabeth Ayoola:That's right. And I changed mine. I had been using my high-yield savings account, I think, for four years. But yeah, like you said, the rates kept going down. And I was like, well, why am I sticking with bad rates?

25:54Sean Pyles:And I stitched in December as well. Get that money.

25:58Elizabeth Ayoola:That's right.

25:59Sean Pyles:Okay. Well, let's turn to another key part of John's question, which is an emergency fund. They say they want a three-month emergency fund. I have some thoughts about how big an emergency fund should be. Do you want to kick us off and tell us about how much people should maybe have or what your thoughts are there, Elizabeth?

26:14Elizabeth Ayoola:Yeah, I think the rule of thumb is that you should have three to six months worth of income in your emergency fund. If you are a single income household like me, then you should be closer to the six-month mark just in case of an emergency, since I don't have anybody else's finances to lean on. So I think that's the rule of thumb there.

26:31Sean Pyles:Yeah, and I'm pretty aligned with that too. I realized that that's a really difficult thing to save toward for a lot of people. So understand that building up an emergency fund can be a multi-year goal. And right now I'm continuing to add more to my emergency fund, even though I'm at the point where I'm in a two income household, I have three months saved in my emergency fund. That's another rule of thumb there. And I feel okay with that amount, but I also like to pad it out because the world is unstable and the job market is tough. So having an emergency fund is your best line of defense against going in debt if and when an emergency does pop up.

27:08Sean Pyles:So just stash away as much as you can. Don't beat yourself up if you don't have three to six months worth of savings. Even$1 ,000 can go pretty far preventing you from pulling out that credit card when your car breaks down.

27:18Elizabeth Ayoola:That's it. And I know if anyone is like me out there, sometimes you feel guilty when you pull from your emergency fund. So I also want people to remember the emergency fund is supposed to ebb and flow because emergencies will come up. So it's OK if you've depleted your emergency fund and you're rebuilding it, like Sean says. That takes time.

27:34Sean Pyles:Yeah, that's a good reminder because every time I use funds from sinking funds, I feel kind of guilty in a weird way because I've been saving up so diligently. And then I had to pull the money out. And now I feel like much poorer than I did 24 hours before. but that's the whole point of these funds anyways. You're supposed to be using the money. I had that experience with my wedding fund where I'd been saving up. I had around$20 ,000 that I'd been building up over five years for my wedding. And then over the course of four weeks, I just spent so much money on the wedding. I felt like I was doing something totally irresponsible, but in fact, I was doing the most responsible thing.

28:12Sean Pyles:I was saving the money I put aside. So talking yourself out of feeling bad for spending money can be kind of a challenge sometimes. Yeah.

28:18Elizabeth Ayoola:And doesn't it just feel good to see all that cash in your account? You just don't want it to go down. I think it's that as well.

28:23Sean Pyles:Yes. I want a big number in my account.

28:25Elizabeth Ayoola:That's it. All right. So John also wanted to know how much of their money they should save. So we love the 50-30-20 framework here at NerdWallet. And for those who are not familiar with that, 50 % go to needs, 30 % to wants, and 20 % to debt and savings. Now, this includes retirement savings and sinking funds. So for John, that 20 % could go towards the sinking fund. Yeah.

28:48Sean Pyles:And something people don't often consider is that when they want to save, say, 15 % of their income toward retirement, that includes their employer match if they get one. So say John's employer matches 4%. In that case, they only really have to save 11 % of their income for retirement. And something I want to throw out too is why we even talk about 15 % of your income as a savings goal for retirement. This is a common rule of thumb that a lot of financial planners will say will help you tuck away enough for retirement. Although that's not inclusive of every circumstance that you might have in your life.

29:23Sean Pyles:We talked a few weeks back with a financial planner from NerdWallet Wealth Partners about how financial planning is so individual. And folks listening, if you have not yet, play with NerdWallet's retirement calculator to get a feel for the numbers that you might need to hit and how much money you might need to be tucking away and what that might mean for a percentage of your income for retirement savings.

29:42Elizabeth Ayoola:Yeah. And I just want to say as well, if John did want to use the 50-30-20 framework, they could put 15 % of their income towards their 401k as they're already doing. And then that extra 5 % could go towards their sinking funds. If you are an ambitious saver and you have big sinking funds goals, you could always increase that 5 % and maybe pull money from that wants bucket just so that you can save more money.

30:05Sean Pyles:John's question also brings up the topic of financial priorities. Which one should you put first, saving for retirement or building up your emergency fund? In general, it's going to be a smarter idea to get to at least$1 ,000, hopefully that three to six month mark in your emergency fund before you are really, really diligently saving for retirement. We know that people are playing the long game when it comes to retirement savings. You want to be able to tuck away as much money as you can, but you also need to protect yourself against the emergencies happening today.

30:32Elizabeth Ayoola:Since we're talking about financial priorities, there also may be priorities amongst your sinking fund goals, right? So I would like to categorize sinking funds into non-negotiable sinking funds and then lifestyle sinking funds. So non-negotiables may be things like childcare, which is an expense that comes up for me every year. Your car, it may not be a monthly expense, but it's one that tends to come up if you're maintaining it. Maybe annual credit card fees. It sounds like I'm talking about all my non-negotiables.

30:58Sean Pyles:I guess you are, yes.

30:59Elizabeth Ayoola:And then lifestyle sinking funds could go towards travel, a new car, things that are not essentials but things that you want just to enhance your lifestyle in some type of ways. So I think it may be good to prioritize the non-negotiables when you're working towards that sinking fund, building it up. And then, you know, you can put the lifestyle sinking funds under that.

31:17Sean Pyles:Distinguishing between negotiable and non-negotiable sinking funds is such a personal matter too, because I hear you say your credit card annual fees. I think that could be a sort of lifestyle sinking fund because we don't need credit cards that have several hundred dollar annual fees every single year. That's a lifestyle choice that can become a necessity because of how you've thoughtfully had some lifestyle creep come about, which can be okay. But just be a friend about that.

31:45Elizabeth Ayoola:I agree. But if I have the card, then I have to pay the fee. So, you know, unless you

31:51Sean Pyles:cancel it before the fee comes to that is a hack.

31:54Elizabeth Ayoola:That is a hack.

31:54Sean Pyles:Okay, well, this is actually a great time to chat about our own sinking fund situations here. At one point, I mentioned I had around 10 different sinking funds, including some checking accounts. But I actually have fewer today. I have eight. And so I have my emergency fund, taxes, fund money, car cash, house maintenance fund, student loans, and then those two main checking accounts that I use. So I guess technically just six sinking funds and then eight checking accounts total.

32:27Elizabeth Ayoola:That's reasonable when you break down what each one is for.

32:30Sean Pyles:Yeah. And I have two that I've retired that I haven't fully closed out. One was my wedding fund because guess what? I already got married and I don't need that money anymore. And then the other one was a fund that I put together for my CFP education a couple years back when I was paying for classes for that. And I think that that shows how funds can change over time. You can have a different purpose depending on your current priorities. And they don't need to be a forever thing.

32:56Elizabeth Ayoola:Why are you doing a student loan fund instead of just having it come out of, I guess, your general bill account, assuming that you have one?

33:03Sean Pyles:This is a personal preference. I hate my student loans. And so I want the money that's coming for my student loans to be in its own account to quarantine it from the purity of the rest of my money. And that's just me being silly and petty about my student loans. Not everyone has to do that with their money.

33:22Elizabeth Ayoola:Yeah. And I think that goes to show you can personalize your sinking funds however you want to. I was just curious.

33:26Sean Pyles:And also it doesn't have to all be the most serious thing you're doing. That is probably the silliest fund I have for my most frustrating bill. And that's a way that I can process it and make it a little bit easier to digest every month.

33:38Elizabeth Ayoola:Absolutely.

33:39Sean Pyles:So Elizabeth, you recently got into sinking funds. Tell me where your situation is.

33:44Elizabeth Ayoola:Well, since this is a safe space, I'll tell you. All right. So I only have one sinking fund right now. I do plan to open at least maybe one more, but I wanted to start since I'm new to sinking funds with my biggest pain point. And just as you hate your student loan repayment, I hate paying for childcare. I hate paying for summer camp. I love it for my son. I love it for Ayo, but I hate it for me.

34:06Sean Pyles:It's not cheap. How much is it?

34:08Elizabeth Ayoola:Oh my goodness. Every summer I spend at least at minimum$2 ,500. That's the least I spend.

34:14Sean Pyles:Just for the summer. Just for the summer. This is an ongoing childcare.

34:17Elizabeth Ayoola:Yeah, just for the summer. I think the most I've spent is maybe around$3 ,000 for the summer.

34:22Sean Pyles:That would be a really nice vacation for yourself if you spent$2 ,500 on a summer vacation.

34:27Elizabeth Ayoola:I'm looking forward to that when camp ends to redirect that money somewhere else. But as I've said on the pod before, the expense comes every summer and I'm shocked and annoyed and I'm pulling money for my savings because I haven't necessarily saved specifically for that goal.

34:42Sean Pyles:Okay. So how are you putting money into the account on a regular basis to hit that$2 ,500 goal by summer?

34:48Elizabeth Ayoola:I am proud to say that I have opened a Dependent Care FSA. Now, for those who don't know what that is, it is an employer-sponsored account. It has pre-tax benefits, and you can pay for qualified dependent care services. So that includes preschool, daycare, summer camps, and all the things. So I've opened one of those accounts. Technically, I don't know if we want to call this a sinking fund. Do we want to call this a sinking fund, Sean?

35:11Sean Pyles:If it's not a checking account or a savings account that you're putting money into, like I described, I wouldn't say it's technically a sinking fund. Sinking funds are usually in these high-level savings accounts.

35:22Elizabeth Ayoola:Okay. Well, in that case, I have an account that I'm saving for, but I don't technically have a sinking fund yet. But we're still doing the basics, right? We're setting aside money for a specific financial goal.

35:33Sean Pyles:There you go. Okay. And so you're putting money into this dependent care FSA. How much are you putting in on a regular basis?

35:39Elizabeth Ayoola:Well, the thing that I do not love about the dependent care FSA is if you don't spend it, you lose it. So since this is my first year doing it, I didn't want to put too much. I believe I'm putting about$300 per paycheck towards the FSA account. And that will help me, especially come summertime, to be able to pay for those expenses with tax-free dollars.

36:00Sean Pyles:Well, I love to hear that. I'm glad that you're saving for this goal in your own way, even if it's not in the sort of traditional high-eld savings account sinking fund way that we typically talk about. So with that in mind, do you think you would ever come to my way of managing your money and maybe having a specific sinking fund in your house savings account for your travel? Cause you love to travel or whatever sort of adventure hijinks you're getting into. Cause you're always going like four wheeling, zip lining, have your zip lining fund set up.

36:29Elizabeth Ayoola:Yes, absolutely. And my main goal, as we talked about in a previous episode, or one of my goals is to save money towards my birthday. So I'm going to open a high yield savings account for that. My goal holding myself accountable is to do it this weekend. It's just, you know, what's been stopping me is looking for all my information. Because when you have to open a new account, they're asking for information and it's either in my book or app or somewhere else. And then I'm like, I'll do it later. So that's one of the main things that I want to save towards. I'd also like to save towards a vacation for me and I'll this year, because we're definitely going to go somewhere probably in August.

36:59Elizabeth Ayoola:So it'd be nice to start saving for that now.

37:01Sean Pyles:You might be surprised how easy it is to open a high yield savings account. You can do it in 10 minutes. What information do you need? Because for me, I just plug it all in and bada bing, bada boom, new account.

37:11Elizabeth Ayoola:Well, I know this is not necessary for every account, but the last high yield savings account that I opened when I transferred my money at the end of the year, they usually ask you to deposit into the account. I know not every account has that as a requirement, but that's when I have to look for my banking information from the bank that I'm going to deposit the money from. And it's a little thing, but you know, it's just something I keep going. I'll do it later.

37:31Sean Pyles:So yes, I think that gets to how there are so many little administrative hurdles in the world of personal finance that discourage people from taking what should be an easy action, like setting up a bank account for this purpose should take you five minutes to do. But if you don't know your account login for where you currently have your money, or you need to find some piece of paper that has all of your like account number and routing number, then you just throw up your hands and you're saying, I'll deal with it later. Next thing you know, three months have gone by. That's it. And you're not using this account at all.

38:02Elizabeth Ayoola:You're not using the account. And the other thing actually, now that you speak of that, the other admin thing I'm gonna need to do is go to NerdWallet and then add, as you said, because I love to automate my deposits as well and make sure that my money is taken straight from my paycheck and put into that sinking fund. So two little annoying things that I need to do.

38:20Sean Pyles:Well, let me know if you want an accountability buddy. I'm happy to keep pestering you about this.

38:24Elizabeth Ayoola:Absolutely. So next week, ask me if I did it.

38:26Sean Pyles:And listeners, if you have any other sort of interesting hacks for how you use sinking funds, let us know. We always love to hear what you are doing with your money. Remember, listener, that we are here to answer your money questions. So turn to the nerds and hit us up on the nerd hotline. You can call us at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdrollet.com.

38:48Elizabeth Ayoola:Gather here next time to hear about how to accurately track your expenses. And in the meantime, follow Smart Money on your favorite podcast app. That might be iHeartRadio, Spotify, Apple Podcasts to automatically download new episodes.

39:01Sean Pyles:Here's our brief disclaimer. We are not your financial or investment advisor. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.

39:11Elizabeth Ayoola:And the episode that you're listening to, this one, was produced by Tess Vigeland, Hilary Georgie, help with editing, Nick Karisamy, and Eve Krogman, helm our audio and video production. Huge thank you to NerdWallet's editors for all their help.

39:25Sean Pyles:And with that said, until next time, turn to the nerds.

39:33Sean Pyles:Akamai Cloud, GPUs for agentic AI. Bring AI inferencing closer to users everywhere. Get started at akamai.com slash GPU.