Sinking Funds for Freelancers — the Key to Everything, From Vacations to Cars

Written by Liz Alton on June 16, 2017

Sinking funds for freelancers should be part of Independent Worker Finance 101. I first came across the idea when I discovered finance thought leader Dave Ramsey. Love him or hate him, he’s got some generally good advice for freelancers: pay off your debt and save, save, save.

One of the tools he recommends is using dedicated accounts to save up for different things, like vacationing, replacing your car or updating your work wardrobe next spring. He’s adamantly anti-debt, and while this doesn’t work for everyone, the less you worry about monthly payments, the more career and creative freedom you have.

Here’s a closer look at how sinking funds for freelancers is a good strategy for saving money, preparing for upcoming expenditures and eliminating some money-related stress.

Look at Your Budget Differently

Many freelancers have developed a budget out of sheer necessity. We tend to know what to expect from our rent or mortgage, utilities and other fixed expenses. There’s a strong chance we even have a good handle on what we typically spend for entertainment, food, gas and other variable costs on a monthly basis (or, at least, what we should spend on them). Without this information, it’s hard to set income goals and keep within the lines of your budget.

But what about big ticket items, like paying your annual insurance premiums, replacing a car or planning your yearly vacation? These goals seldom fit neatly into the budget, so we stockpile money for “future needs” without a clear sense of where it’s going.

Sinking funds for freelancers take a different approach. Sit down, think about what you know is coming up and start budgeting for it now:

  • For instance, if you have a vacation planned at the end of the year that will cost $1,200, put $100 into a dedicated vacation fund every month.
  • If you’re planning to buy a new washer and dryer in the next six months that will cost $1,000, put aside $166.66 on a monthly basis, and you’ll have the cash on hand.
  • Have a bigger goal, such as needing a $25,000 down payment for a vacation condo you’d like to buy in five years? If you’re consistently saving each month for the next five years—or sixty months—roughly $416 per month will make that vacation home a reality.

The Car Example: My Secret Prius Addiction

I bought my first Prius — creatively named Pria — the year it came out, and I drove it for years until a family member needed a new vehicle. She took the car, and that original Prius retired earlier this year with 250,000 miles on it. The car I replaced it with (Pria II) is now nine years old and just cresting 100,000 miles. If my steady maintenance and best laid plans bear out, we’re in the middle of our relationship, which will go for another several years.

Why? I could buy a new car with fewer miles (perhaps Pria III?) or finally give into that nagging desire to buy something that handles better in the snow. But I won’t for two reasons: I really like life without a car payment, and I don’t have enough cash on hand in my car sinking fund to walk into the dealership and pay cash for the car I want. My car sinking fund is a savings account dedicated to helping me outright buy a car or be a lot closer to a smaller car payment.

Let’s assume the car I want, fully loaded and with warranties, will run $20,000. In my sinking fund, $5,000 has been stockpiled toward that future purchase. I need to close a $15,000 gap, and I have at least four years to get it done. I’d like the option to replace the car at that time, in case Pria II is starting to kick up bills that cost more than she’s worth. So, for the foreseeable future, I just need to save the equivalent of a car payment (around $312 a month), and that cash will be ready to go when I need a car. Pria III should be interest free.

The Logistics of the Sinking Fund

Sinking funds for freelancers can help you reach any goal, whether it’s a long-term goal or simply having the cash flow needed for a specific short-term need, like a vacation or a splurge purchase. Here’s a quick and easy guide to using this method:

  1. Define your goal. Realistically figure out what it will cost and when you need or want to make the purchase. Divide the total cost by the number of months or weeks you plan to set money aside. That’s your target contribution.
  2. Set up a separate savings account or checking account to put the money into, maybe even a high-interest account. Keeping it separated will limit the temptation to spend it on other things.
  3. If possible, automate the process, so the payments are deducted at regular intervals. If that’s not possible, add a note to your calendar to do so each week or month on a set date.
  4. Cash flow challenges happen. If a client pays you later than you planned or your income dips below target plans, you can always adjust your savings plan by changing the deadline, using bonuses to make up ground or even taking on extra work to fund your goal. As a freelancer, you have more control over increasing your income than someone with a fixed, steady job.

If you’re looking for a creative way to save money for a goal on a variable income, sinking funds can help. Whether you’re saving up a down payment or want to pay cash for something in total, a dedicated savings account tied to an actionable goal can get the job done.

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