What are Sinking Funds?
A sinking fund is a fancy way of having a savings account for expenses or things you want to buy. It is like a layaway plan for yourself. You can create a sinking fund for just about anything. If you know you will be going on vacation in 6 months, you can set up a sinking fund for that. You can also set up a sinking fund for your monthly recurring bills. For example, if you know that your cell phone bill will be $50 every month, you can set aside $600 to cover your cell phone bill for the year.
Why You Should Have Them
Sinking funds help you plan ahead. Sinking funds can help relieve the burden of large purchases or expenses. Knowing that you have the money set aside for any upcoming expenses or big purchases can help alleviate the stress around those. It feels different when you know that you have saved up for that vacation and you don’t have to put all your purchases on a credit card.
How to Set Up and Use Sinking Funds
So how do you set up sinking funds? You can either use cash envelopes for expenses such as clothing, gas, or car maintenance. But, for larger expenses like vacations, recurring bills you can use an online savings account. Look into an account that will let you set up multiple savings accounts for each sinking fund.
Say you want to set up a sinking fund for a vacation in six months. First, start by calculating how much money you think you will need for the vacation. Then divide that by the number of months you have until the vacation. This will help you determine how much money you will need to save each month to reach your target.
Sinking funds can be a great tool when you are trying to stay on budget, If you need help setting up a budget see my post on Budgeting Basics.