How to Use Sinking Funds to Achieve Financial Success
A sinking fund is a strategic way to save money for a large purchase by putting aside money each month or paycheck until you reach your goal. Mapping out large expenses and regularly putting aside money for them gives you peace of mind in your finances and keeps you from going into debt.
Examples of sinking fund uses are:
A vacation (Disney… here we come!)
A new car
Christmas shopping
A major home repair or renovation
A wedding
New tires for your car
A down payment for a house
How to use a sinking fund.
To determine how much you need to save each month or paycheck, take the total amount you need to save for an expenditure and divide it by how long you have until you need to pay for it.
For example, if you are saving for a $6,000 vacation in fifteen months, you will put aside $400 per month for the fifteen months leading up to when you will pay for your vacation. If you only have twelve months to pay for the vacation, you would put aside $500 per month, or approximately $231 per paycheck if you get paid bi-weekly ($6,000 ÷ 26 = $230.77).
*Why 26 instead of 24 instalments on a bi-weekly basis? Technically in a 12 month period you will have two months where you will received three pay on instead of two. 52 weeks in a year divided in half is 26.
Where should I keep my sinking fund?
Keeping your sinking fund(s) in a savings account with no additional fees is the easiest option. You want to make sure the money is going to be available to you when you need it, but not just sitting in your everyday banking account where it could accidentally get used. Although any interest earned on your sinking fund savings is a bonus, the goal of a sinking fund isn’t to be earning interest.
Your sinking fund account should be separate from your emergency fund so that you aren’t tempted to spend your emergency fund on something that is not an emergency. Anything you can anticipate coming is not a true emergency which is why you should be planning and saving for large purchases with sinking funds.
How many sinking funds should I have?
You can have as many sinking funds as you need or want. If you have several areas you are saving toward, it’s okay to have several sinking fund categories on the go. Just don’t have your money filtering into too many different funds so that you aren’t making significant progress in any specific area. If you have an important upcoming goal of replacing your current vehicle with a more reliable one, you don’t want to be saving too aggressively toward something like a vacation. Needs should come before wants, always.
If you’re saving for multiple goals at once, keep a ledger so you know how much in your account is for which of your sinking fund items. There are also some cases where it might make sense to keep your sinking fund as cash.
If you are saving for car repairs, a new computer, birthdays, and Christmas, you might save:
Car repairs - $100
New computer - $100
Birthdays - $50
Christmas - $200
In this example, you would be saving $450 per month towards these goals.
Get started with sinking funds today!
The key to making sinking funds work is patience and planning. Knowing what your future expenditures will be and having the self-control to save for them is important.
The simplest way to start is by making a list of savings goals that you could use a sinking fund for. Don’t be overwhelmed if the list is long. You can organize it by priority and timeline, and start from the top.
Once you get moving with sinking funds, you’ll be building muscles for saving in this way and it will become easier and easier.
Download our free Sinking Fund Tracker to help you stay organized with your savings!
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