What is a sinking fund?
I think of a sinking fund as a mini-savings fund for a specific purpose. For example, if you want to save $1,000 to begin Christmas shopping on November 1st and you begin saving as of April 1st, you’ll need to save for 7 months.
So, $1,000 / 7 = ~$143. Your monthly sinking fund would be ~$143.
Why are sinking funds important?
Sinking funds are important because it’s crucial to budget for all expenses that are foreseeable so that we are not blindsided by these expenses. Some expenses are not monthly and thus we will need to set aside money on a routine basis to make those payments.
A goal that requires us to save small amounts over time can be easier to accomplish versus coming up with a large chunk of money in a short period of time.
What sinking funds will you set up?
Take a moment to think about where you can benefit from sinking funds. Here are some ideas: car insurance, car maintenance, pet care, Christmas gifts, clothing, kids’ school supplies etc.
Add a line item in your budget for your sinking funds so that the sinking fund deposit becomes a regular paycheck/budget expense.
Where will you keep your sinking funds?
I like to think of sinking funds in two buckets – short term and long term. I consider short-term to be within the next 1-3 months and long-term to be 3 months or longer.
If you need your money within 3 months, consider a cash envelope sinking fund method. You would withdraw the monthly budgeted amount for the next 3 months and tuck it away in an envelope until the money is needed.
If your sinking fund is for an obligation that’s longer than 3 months from now consider using a high-yield savings account. Many online accounts allow you to set up sub-accounts or buckets to save for specific things. You can have a sub-account for each of your sinking funds and even set up auto-deposits. It will be exciting to see your sinking fund accumulate money until the time you need it.
Sinking funds can feel so empowering because when those irregular expenses pop-up, you will be prepared!