4 ‘Sinking Fund’ Strategies to Keep You Prepared for the Holidays
Written by
Jennifer Taylor
Edited by
Angela Corry
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The most expensive time of year has arrived. Spending on holiday gifts, decorations, parties, dinners and travel can add up fast, so having a ‘sinking fund’ — i.e., money allocated to extra spending and travel during the holidays — can make your season merrier.
It’s never too late to start putting money aside for the holidays, as every dollar can help. Here are a few holiday sinking fund strategies to help you avoid debt and ease stress this season.
Plan Your Spending
The holiday season is filled with warmth and generosity, which could inspire you to go overboard with spending. Buying extra might feel good in the moment, but it won’t feel so great if you get yourself into debt.
“I suggest consumers be like Santa — make a list of everyone they need to purchase gifts for, set a spending amount for each and do not deviate from that list,” said Rod Griffin, Senior Director of Public Education and Advocacy at Experian. “This ensures they are purchasing for everyone on their list without breaking the bank or taking on debt.”
Spend Wisely
“I’d also advise consumers to find ways to spend that can benefit them,” Griffin said. “For example, [a recent Experian survey revealed], 46% of consumers plan to use a major credit card to do their shopping and 15% plan to open a new credit card to receive benefits like cash back rewards (41%), retail store discounts (27%) and travel rewards (26%).
If you’re certain you can handle holiday shopping using a credit card, instead of strictly sticking to a debit card or cash, earning points, rewards and scoring discounts can be financially beneficial. Just keep close tabs on all your purchases to make sure you’re not spending more than you have saved in your sinking fund or the credit card perks won’t be worth it.
Open a High-Yield Savings Account
“Like any other goal, the first thing to consider is how important buying gifts during the holidays is to you,” said Filip Telibasa, CFP, owner and planner at Benzina Wealth.
If it’s part of your core beliefs and values, he said to think about how much money you’ll need to cover gifts.
“From there, you can set up a separate high yield savings account specifically for this goal, six months or more in advance and schedule automatic transfers to it around the date(s) of your direct deposit,” he said. “This way, it is out of sight and mind.”
It might be tempting but don’t touch that money before you’re ready to start shopping.
“When the holidays come around, you have the money available to buy all your gifts without digging into credit cards or any other form of high interest debt,” he said.
Remove Spending Safeguards on Your New Account
Stephanie Loeffel, CFP, founder and lead financial planner at Ascend Financial LLC, agreed that it’s important to create a separate account for holiday spending.
“The age-old method of setting aside cash in an envelope does not necessarily work logistically with how we spend money these days,” said. “We need to purchase items electronically online or we need to reimburse family and friends for group gifts using Venmo or Zelle.”
To stay on budget, she said to fund your new account with a predetermined amount of money.
“Create a virtual envelope of cash,” she said. “Get a new debit card on this checking account.”
She said to remove any safeguards that may allow you to go over budget.
“Turn off any overdraft protection,” she said. “Ideally, you will log in to check your balance as your holiday spending is underway, but even if you miscalculate, when you run out of funds, you’ll know immediately because your debit card will get declined or your transfer app will fail to process your transaction.”
This might seem extreme, but it can be necessary.
“Sometimes, we have the best intentions for budgeting, but if we don’t create hard guardrails, the ease and convenience of credit cards or overdraft protection can lead to overspending,” she said.
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