We may receive commissions from some links to products on this page. Promotions are subject to availability and retailer terms.
MoneyWatch: Managing Your Money
By Joshua Rodriguez
Edited By Angelica Leicht
/ CBS News
Sinking funds are an effective way to plan for upcoming expenses. For example, if you know you'll need to pay $750 to renew your car insurance in six months, you could put $125 into a sinking fund each month. When the clock expires after six months, you'll have the $750 you need to renew your insurance without having to make sacrifices.
Many people could benefit from having multiple sinking funds.
But where should you store the money as you save it? You could keep envelopes of money in your safe, but that can still be a little risky. Plus, liquid cash doesn't earn any interest. In many cases, it makes more sense to consider keeping your sinking funds in a high-yield savings accountinstead.
Open a high-yield savings account now to earn more interest as you save.
Why you should keep your sinking funds in a high-yield savings account
High-yield savings accounts are like traditional savings accounts in that they're a safe place to store your money. They also provide access to your funds when you need it. But as the name suggests, these accounts usually have much higher interest rates than their traditional counterparts. Here's why you should keep your sinking funds in a high-yield savings account:
To earn a meaningful return on your money
Some of the top high-yield savings accounts offer rates ranging from 4.25% to 5.27%. That's significantly higher than the average traditional savings account interest rate — which is just 0.46%.
Any money that's not earning returns that are equal to (or greater than) the current inflation rate is losing value. When you take advantage of the top high-yield savings accounts, you'll tap into a positive inflation-adjusted rate of return.
Explore how high-yield savings accounts help your money work harder for you.
To have easy access to your sinking funds
Sinking funds are used to save for large expenses on the horizon. So, when those expenses arise, it's important that you're able to access the money you've saved for them.
High-yield savings accounts are similar to traditional savings accounts in that they give you easy access to your money. In most cases, you'll be able to withdraw money from your account up to six times per month. Just keep in mind that you may have to pay a fee if you go over your account's maximum withdrawal limit.
To separate your sinking funds from your daily spending money
It's never a good idea to keep your daily spending money and savings in the same place. For example, you shouldn't keep your emergency fund in your checking account. That's the case for your sinking funds, too.
If you keep your sinking funds in your checking account, there's a high likelihood that you'll use the money for a purpose other than what you're saving it for. This could put you in a bind down the road. But when you separate your sinking funds by putting them into a high-yield savings account, you'll make it easier to accomplish your saving goals.
To keep your funds secure
Most high-yield savings accounts offer either FDIC or NCUA insurance on balances up to $250,000 per depositor, per account. So, you don't have to worry about losing your money if the bank goes out of business. With this insurance, you'll get back the money in your account, even if the bank fails.
Just be sure to open your account with a reputable financial institution and verify that the institution offers deposit account insurance.
Keep your sinking funds safe in a high-yield savings account today.
The bottom line
Sinking funds can be effective financial tools, but putting money in your sinking fund is only half the battle. It's also important to keep your money there until you need it. Moreover, you'll want to earn at least enough of a return to cover the cost of inflation. Today's best high-yield savings accounts may help you check all of those boxes. Open one today to keep your sinking funds safe and earn a meaningful return in the process.
