BeckyWhat is a sinking fund?
Sinking funds are great for building up savings for specific things. Money is set aside monthly to prepare for a future purchase.
Unlike a regular savings account or emergency fund, sinking funds are created for a specific purpose-i.e. Christmas, vacation, home improvements, etc.
Here I’m going to share with you what a sinking fund is, how they work and how you can use sinking funds with your own money.
My husband and I have used sinking funds for quite some time and the first time we became debt free, it helped us tremendously.
We still use them to this day. The 3 categories we use regularly are celebrations (birthdays, baby showers, weddings, holidays), home improvement, pets and car maintenance (oil changes, windshield wipers, etc).
We found it much easier to stay on track with our budget if we didn’t have to scrounge up money on a whim. We knew we could anticipate things like birthdays, oil changes and pet food.
In having a sinking fund for these categories we always have money on hand when these purchases come up.
Every month you’ll set aside money to one or more sinking funds, which in turn will be used for a purchase later. By saving smaller amounts each month, you won’t have to come up with a lump sum later.
Sinking Fund Categories
Sinking funds are a great way to save up for more expensive purchases that you know are coming.
Here are some categories you can implement:
Vet bills/pet expenses
Christmas gifts
Home improvement
Car maintenance
Car purchase
Clothes
Vacation
Birthdays/weddings
The Benefits of sinking funds
The use of sinking funds is beneficial for avoiding the use of an emergency fund. Instead of seeing unexpected expenses as an emergency, it provides a buffer. It allows the ability to come into those expenses more prepared.
While not everyone keeps sinking funds in a bank account, some accounts accrue interest if the sinking fund is in a bank account. Many banks will allow you to create subaccounts on the side of your regular savings and checking accounts.
Credit card debt gets many people into financial stress. A sinking fund helps people avoid using a credit card. By having money set aside in advance, there’s no need to pull out that credit card and pay for it later!
Think about the financial freedom it would offer because they help us get ahead of debt. Can you recall a time you’ve been in a jam to pay for something you didn’t have the money for? By being proactive, you can avoid adding debt and be one step closer to financial freedom!
One of the greatest benefits of having sinking funds is that you can save for anything and everything you can think of! Having that organization and control over my money helps me sleep better at night. I no longer worry about where money is going to come from for any given expense, especially the larger expenses!
Now let’s learn how to put this plan into action in with your own finances!
How to apply a sinking fund
Decide which categories to save up for
First, you need to decide what you are saving up for. Which sinking funds would you like to apply in your life. Make a list.
Where to store sinking funds
Next, you’ll want to determine where you’re going to keep your sinking funds. For monthly sinking funds, we keep envelopes at our house because it makes for easier access to those smaller funds when we’re out shopping.
However, for bigger sinking funds you may feel more comfortable leaving those in your bank account. As mentioned before, you can request to have sub-accounts created or just keep the sinking fund balances in your savings account and track how much you have in each fund wit your monthly budget.
How much do you need to save
Once you’ve decided where you’re going to store your sinking funds, it’s time decide how much you need to save!
For this example, let’s say you’re saving up for Christmas gifts. If you determine you need $1000 for your Christmas gifts and expenses, you will need to save roughly $85 each month ($1,000/12=$83.33).
By December you should have $1020 to spend on Christmas gifts and other various Christmas expenses ($85×12=$1,020).
Incorporate your sinking fund into your budget
Now that you have your dedicated sinking funds with their set amounts ready to save for, it’s time to incorporate them into your budget monthly.
Make sure to include a line item for each sinking fund so you have a plan. Then as you fund those sinking funds, track how much is put into it each month. This keeps you accountable and helps track how much is remaining to reach your financial sinking fund goal.
Overall Sinking Fund Takeaway
Remember not to over-do it. Too many sinking funds can make things complicated, while having the right amount can make wonders in your budget!
Sinking funds are critical when you’re trying to get out of debt and even when you’re working on just organizing your money.
While sinking funds are beneficial for monthly expenses, they can also fuel exciting optional expenses like vacations, concerts and more!
