Disclosure: This post may include affiliate links. If you click on the link and make a purchase, I may earn an affiliate commission at no additional cost to you. Learn more.
You’re probably scratching your head, thinking: “What is a sinking fund?”
The idea behind a sinking fund is to avoid financial strain or debt by planning ahead.
For example, you’re eyeing a $5,000 vacation this year. You set up a sinking fund where you begin putting aside a bit each month specifically for this trip, and you’ll dip into this fund when the time comes.
In short, a sinking fund is dedicated to a specific, upcoming expense – be it a vacation, an anniversary, a birthday celebration, or even your yearly property taxes. It’s a proactive approach to planning for your upcoming expenses.
Instead of scrambling for money when the time comes, you’re all good to go.
This method breaks down your expenses, especially large ones, into manageable, bite-sized savings goals.
Sinking Fund Vs. Emergency Fund
How are they different?
An emergency fund is your safety net for unexpected expenses such as a sudden job loss, a medical emergency, or a major home repair. These are things you can’t really foresee and plan for.
A sinking fund is for expected expenses. It’s for saving for education, a new car, anniversaries, or the family vacation you’ve been wanting to go on. These are expenses you can see coming and plan for.
In short, sinking funds are for upcoming known expenses and are used for that specific purpose. An emergency fund is for unknown expenses and is used only for emergencies.
The Benefits of Sinking Funds
Whether you’re setting aside money for your annual insurance premiums, holiday gifts for the kids, or that long-awaited home renovation, each sinking fund represents your specific goal.
By setting up sinking funds, you break those expenses into digestible sizes, making saving up toward those goals easier. This approach not only simplifies managing your money but also reduces financial stress and gives you peace of mind. It also stops you from accumulating unnecessary debts, as you would’ve already saved up the cash for the expected expense.
Setting Up and Managing Your Sinking Fund
Alright, let’s dive into setting up and managing your sinking fund.
1. Setting Your Sinking Fund Goals
The first step is to ask yourself, “What exactly am I saving for?”
Here’s a quick list of common sinking fund goals to get you started:
- Education
- Home Renovation
- New car
- Charity
- Insurance Premiums
- Gifts
- Wedding
- Vacation
- Medical
- Childcare
- Special Occasions (Eg. Anniversaries. )
So, which ones are you looking to save up for?
Whatever it is, you’ll want to start saving up for it as soon as possible so you won’t find yourself in a situation needing to swipe your credit cards.
2. Finding the Ideal Home
The next question is: Where do you keep this money?
A separate savings account does well for this purpose. But for those wanting more, high-yield savings accounts or money market accounts are worth considering. These options offer a little extra interest, making your money work harder for you.
Be sure to know what you’re getting into, such as the minimum amount and monthly fees.
3. Breaking It Down & Inputting It into Your Budget
How much do you need to save, and by when?
Let’s say your goal is a $1,200 laptop, and you have 6 months to save. That comes down to $200 a month.
After figuring out how much you need, the next step is to input it into your budget.
Take a good look at your income and expenses. Is it possible with your current finances? Yes? Good. But if not, then you will need to adjust your goal or perhaps find ways to cut your expenses and squeeze out the $1,200.
Also, treat your sinking fund like any other essential expense. Put it right there in your budget alongside your rent or mortgage, utilities, and groceries. By adjusting your spending habits and treating your sinking fund as a “need,” you’re taking great strides toward achieving your goals.
How Many Sinking Funds Should You Have
While you can have multiple funds for different goals, too many can spread your resources thin and can be overwhelming.
So, you’ll have to figure out which is crucial and which can wait.
For example, your vacation fund might need more now, while the new car sinking fund can grow slowly. It really comes down to what’s most urgent and important to you.
Illuminating Your Financial Path With Sinking Funds
Once you start having sinking funds, you’ll never find yourself short on cash or worrying about any expected expenses.
And that’s the best thing about having a sinking fund.
So, why wait any longer?
Set your goal, build your sinking fund, and watch as each saving brings you closer to your aspirations and a stress-free life.
Let’s start saving!
