Sinking funds: Start Today with These 5 Steps
It’s not necessarily the amount of money you make that makes you happy. Instead, it’s your bank balance. It’s the amount of money you have available, that really matters.
Your savings account is essential to your happiness. And how you manage your savings account is even more critical. Now there are a lot of tools out there to help you save money that usually start with a budget. However, there’s less information on how to actually keep some of that money for specific purposes. Enter sinking funds.
Sinking funds are one of the best ways to save money without feeling guilty when you need to spend it.
In this blog post, we are going to talk about sinking funds, sinking funds categories, and how to get started. Let’s go!
What is a sinking fund?
The name sinking fund originated as a fund that was set aside by companies to pay off a debt or bond. It was intended to soften the hardship of paying a large amount of revenue at any given time. Thinking like a business owner has prompted the use of sinking funds for those seeking financial independence.
Rather than looking to pay off a debt, a sinking fund is used to prevent the need to use debt to fund a significant financial expense. A sinking fund is a savings account that you intentionally put money toward each month for a planned future expense.
What is the difference between a sinking fund versus emergency fund?
Sinking fund versus emergency fund. Do you really need both?
Yes. A sinking fund is not an emergency fund. An emergency fund is used to fund unexpected costs that you didn’t plan for. For example, losing your job or being hospitalized. Certain car repairs would be an emergency expense versus new tires, which are part of your car’s maintenance. An emergency fund can take some of the stress away from major emergency expenses.
On the other hand, sinking funds are for planned expenses. You may want to go on a unique vacation once a year. to do something you haven’t done before. You know this upfront and need to prepare for it upfront. You anticipate that you are going to have certain costs associated with your vacation, and you can plan accordingly. Or perhaps you know that you’re going to need new tires every 2 years, and you want to save $20 every month to make sure you can pay for those new tires without stress when it’s time.
Do I need a sinking fund?
When used correctly, sinking funds help you avoid debt and enjoy spending money because you have it.
You know that Christmas and Birthdays are going to come once a year, but that doesn’t mean you can afford to alter your budget for a few hundred more dollars in any given month.
If you don’t have a sinking fund, you may find yourself using credit cards or dipping into the emergency fund. Sinking funds will ensure you stay on track with your money goals.
What are sinking fund categories?
You can turn anything you want to spend money on in the future into a sinking fund. Some categories below will apply to you, while others won’t. Don’t worry. There’s no right or wrong way to sinking funds. Take time to establish your SMART money goals.
Types of sinking funds:
- Home expenses
- Kid expenses (graduation, prom, school expenses, daycare)
- Car-related planned costs (routine maintenance)
- Medical expenses
- Major discretionary purchases (furniture, electronics, appliances, etc.)
- Pet expenses
- Gifts (Christmas, Birthdays, Anniversaries)
How much should I save in a sinking fund?
How much to save is really going to be a personal decision based on your goals.
If you know how much something is going to cost and when you want to have it, well, just divide the total cost by the time, and that’s how much you need to save every month.
For other expenses, you may not quite have something in mind, but you want to make sure you’re saving for the day you can buy something big. For example, you may not need a new computer in 6 months, but you want to make sure you are saving for major discretionary purchases because you know you’ll need one in a year or two, and you want to be prepared.
Automate your sinking funds
I like to keep sinking funds in a high yield savings account, but you may not have the minimum balance to do that just yet. Don’t worry. Put it in any savings account that is not associated with fees.
I recommend having all of your sinking funds in one account where you keep a sinking funds tracker to track how much is in each sinking funds category within the one account.
Having one account for all of your sinking funds will help you reach the higher balance needed for a high yield savings account, and it’s easier to keep track of.
Automate how much you are putting in your sinking funds by transferring the money to a savings account that is not associated with your checking out via your paycheck or bank transfers weekly, bi-weekly, or monthly.
How do I start a sinking fund?
- Identify your sinking funds categories
- Open a savings account or high yield savings account (separate from your checking account)
- Determine how much you want to save for each category every month with your budget.
- Automate transfers to your sinking funds
- Use a sinking funds tracker to keep track of your category balances
Sinking funds are a great tool to get you saving for significant financial expenses that you know you’re going to need to fund in the future. Sinking funds are easy to budget for and help minimize the stress and worry of not having enough money. Be sure to follow the steps outlined in this blog post to get you started. Are you ready to get started with a sinking fund now? Comment below.
Theresa is a personal finance blogger. She writes content for busy professional women to take control of their money and investments. She enjoys reading, traveling, cooking, and writing. Her work has been featured on GoBanking Rates, Your Money Geek, Savoteur, the Corporate Quitter, Thirty Eight Investing, and more.