There are numerous budgeting terms to stay abreast of these days, and some of them can be intimidating. In this discussion, I will cover sinking funds, their definition, how to set them up, and other important details. Including sinking funds in your budget is essential for everyone.
What are Sinking Funds?
A sinking fund is a technique for saving money for a particular expense by setting aside a small amount each month. The process involves setting aside money in one or multiple categories each month to be used for a future expense. By doing this, you can accumulate small amounts of money over a longer period of time, instead of having to come up with a large sum of money all at once.
Sinking funds are particularly useful for expenses that you don’t want to pay for all at once in a single month’s budget, such as:
- New tires for your car
- Christmas gifts
- Vet bills
- Wedding expenses
- Plane tickets
- Birthday parties
- School books and supplies
- Clothes for a special occasion
- Vacation
- Home remodels
Sinking vs Savings Account
A sinking fund differs from a savings account in its level of specificity. With a sinking fund, you have a clear understanding of how much you need to save and when you will need it. This level of intentionality is important because if you save for different goals in a single savings account, such as a new car, vacation, gifts, and holiday expenses, the lines between these goals may start to blur.
To avoid confusion and stay on track with your financial goals, it’s recommended to establish multiple sinking funds instead of combining everything in a single savings account.
Sinking vs Emergency
A sinking fund and an emergency fund serve different purposes. An emergency fund is meant to provide a safety net for unexpected expenses, such as a medical emergency, job loss, or home repairs. It should cover 3 to 6 months of living expenses to help you weather any unexpected financial storms that may come your way.
On the other hand, a sinking fund is designed to help you save for planned expenses, such as a down payment on a house, a new car, a vacation, or a wedding. With a sinking fund, you know exactly what you’re saving for and when you’ll need the money. This allows you to plan your finances more effectively and avoid the stress of having to come up with a large sum of money all at once.
Benefits of a Sinking Fund
Adding sinking funds to your budgeting routine can transform your relationship with spending money. Regardless of whether your purchases are enjoyable or not, all of your expenses come out of the same account, and every transaction can leave you feeling financially depleted.
However, incorporating sinking funds into your budget can change the game. With sinking funds, you can:
- You can save for anything and everything you want with sinking funds. The more specific you are, the better you can ensure that all your needs and wants are covered on your list.
- Incorporating sinking funds into your budgeting routine enables you to plan for big and exciting expenses, even if they may seem unattainable at first. Whether it’s renovating your kitchen, embarking on a dream vacation, investing in your hobbies, or making generous donations, you can allocate funds towards your desires each month. By taking control of your finances and being intentional with your spending, you can make room for fun without feeling guilty or anxious about overspending.
- Eliminate any guilt that may come with making big purchases. Plan ahead with your spouse, if you have one, by determining what you want to save for and how much you want to set aside. When the time comes to make the purchase, you can do so without any feelings of concern or remorse.
- Anticipate inevitable expenses in advance. If you notice that your car tires are getting worn out, start saving for new ones. If you just purchased an older house with a roof in need of repair, start setting aside money for a replacement. These expenses are not yet emergencies, and if you begin saving for them in advance, they may never become one.
You can see more of my budgeting posts here!
Love, Bee xxx