With interest levels so low, I'm not sure it much matters for short-term, smaller sinking funds. But I like to keep mine in bank accounts instead of in actual cash as it makes them harder to access on a whim. I also keep them separate from the general EF account. Capitalone360 lets you keep online accounts, and you can open and 'name' as many as you wish with no fees or minimum balances. I even have one going for my son's class trip to DC- which isn't for another 4 years! But I like to shove $5 or $10 over that way randomly to keep that account going upwards so that when the time comes, we'll have the money without scrambling.
For my family, I find the interest rates aren't enough for us to keep our sinking funds in a bank. I (I do the finances) do much better collecting the cash in envelopes. I love seeing it grow and don't want to touch it because of all the hard work we put in to saving it! I have envelopes for anything that requires planning.... seasonal clothes, Christmas, School related stuff, snow tires, etc.
We do have a few bank accounts for the big stuff, like our EF and vacation.
I establish my sink funds electronically through the bank and only use the cash envelopes for reoccurring monthly payments that don't exceed $250.00 (like restaurants and groceries). It's a nice psychological boost when I log in to my bank accounts and see my little 'stockpile' of cash in my sink fund. I feel encouraged!
I hid money to buy that car for Dh! and I like having cash stash for Garage sales as we buy most everything that way.
Also a keep it out of the general bank acct for things like taxes and home ins.
Comes down to what works for you. .25% doesnt excite me and irritates that it goes on my taxes.
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