The Ultimate Money Hack That Saves You From Debt
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Let’s face it …
Big, fat, ugly, expensive crap is going to sneak up on us.
No matter what.
It’s a fact of life.
It should be added to the list of things you can’t avoid: death, taxes, and big fat ugly expensive crap.
It’s not always fun (except when it’s Christmas – fun but still expensive).
So what do we do?
Typically we just slap down a credit card or sign up for financing options.
I don’t blame you if you do. Sometimes it’s your only option.
Heaven forbid your water heater breaks and floods your basement.
I don’t know about you, but I really don’t need the stress of extra debt and extra payments piling up against my list of current bills.
In order to stay on the offensive, what you really need is a plan.
In our home we’ve taken the concept of sinking funds and turned it into our ultimate money hack that saves us from ever having to go into debt.
What on earth is a “sinking fund”?
Glad you asked!
On the surface it doesn’t sound too appealing.
We affectionately like to refer to sinking funds as money buckets.
(Buckets of money sounds a lot more alluring than a sinking fund, don’t you think?)
It’s a brilliant way to save money and be able to pay for virtually anything with cash.
This concept was a complete life changer for my husband and me. This one strategy has brought more peace of mind to our finances than anything else.
Like the idea of buckets of money?
Let’s take a closer look …
The technical definition of a sinking fund is setting aside money periodically to gradually repay a debt.
We use a sinking fund, or rather money buckets, to periodically and gradually set aside money to save up to pay for virtually anything we want.
Each expense we are saving for gets its own "bucket".
If we're saving for Christmas, we start a "Christmas Bucket" and start putting money into it by keeping track of savings on an excel spreadsheet.
Here's a screenshot with a basic example:
3 things to consider (and a formula)
- What are you saving for?
- How much do you need to save?
- How long do you have to save up for it?
Let’s say you'd like a new laptop soon so you’re going to save up $800 in 6 months.
$800 divided by 6 months means you would need to save $134/month or $67/paycheck if you get paid every other week.
Related Article: How to Pay Cash for Big Expenses
Obviously if you have more time to save you won’t need to take out as much per paycheck.
Do you realize what this means?
No more credit cards.
No more unnecessary debt.
No more big expenses sneaking up on you and breaking the bank.
Let’s take Christmas as an example.
It’s December 25th.
Every. Single. Year.
In our house, we decided how much we’d like to spend for Christmas, then take a small amount out of each paycheck to save up for it.
And guess what?
When the holiday shopping comes, we have money to pay for everything we need.
Without putting a solitary dime on a credit card.
Not picking up extra shifts or working overtime to earn money to pay for Christmas.
Want another example?
Tires on the car. You know they are going to wear out. They only last so long.
Option 1: The "Wait Till We Need It" Plan
Wait till your tires are bald and desperately need replacing.
Go into the tire store and suck in your breath as they quote you how many hundreds of dollars you’ll be out.
Wonder if you can cover the cost and still buy groceries and presents for little Johnny’s birthday coming up.
Hesitantly pull out your credit card with a sigh of relief think that at least you can afford the payments.
Try not to think about all the interest you'll have to pay, knowing the tires are really going to cost you double.
Option 2: The "Prepared in Advance" Plan
Be a savvy consumer and call the tire shop to find out your options for tire replacement and get prices. You could even take your car in and see how long your tires have left before they need to be replaced.
Start a money bucket for tires. Do a little math to figure out how much you need to save each paycheck.
When it’s time to get new tires …
Done! No problem!
It’s not going to interfere with any other bills you have coming your way. You can have your new tires and Johnny’s birthday cake too.
No credit card required.