Sinking Funds have been a major game changer for me in my journey to be debt-free. You’ve probably never heard of the term, but it’s likely that you already have one.
What is a sinking fund?
A sinking fund is a savings plan for money that has been set aside for a specific expense. With a sinking fund, you set aside a little bit of money each pay period to prepare for a future expense. Having a sinking fund eliminates the need to use your credit card and hopefully, eliminates stress and guilt about the purchases you need to make.
What’s the difference between a sinking fund and regular savings?
Unlike regular savings, a sinking fund has been designated for a specific purpose and has a “use by” date. A regular savings is not typically tied to a use by date or a specific spending category. Regular savings would be more appropriate for unexpected expenses such as losing your job or a long term savings goal such as a down payment for a house.
When would I use a sinking fund?
What you choose to designate for your sinking fund is up to you, but below are a few that I recommend:
- Wedding Expenses
- Birthdays or Anniversaries
- Concert Tickets
- New Clothing
How do I keep my sinking funds organized from my regular savings?
Keeping my funds organized was always my biggest struggle. Before I began using sinking funds all of my money went into one account. It was always a guess of how much money was for vacation and how much was for another event. Now I use a tracker to keep a record of what event I’m saving for, how much I intend to save and how much I saved thus far. Once you know how much money has been specified for your goal you can choose to keep the money in the bank or keep it in a cash envelope for easy access.
How do I determine how much to save to reach my sinking fund goal?
To determine how much you need to save to reach your sinking fund goal, divide the amount you want to save by the number of pay dates until you need the money. Here are two scenarios:
Sinking Fund Goal – $500 for Christmas
Although Christmas is on December 25, you will probably need the money before the 25th to purchase gifts. Let’s say you want to have all gifts purchased by November 29. You have 15 pay dates until November 29. $500/15 pay dates = $33 you will need to save per paycheck towards your goal.
Sinking Fund Goal – $200 for Anniversary
Your anniversary is June 12. You have 3 pay dates until your anniversary. You won’t need the money until the day of, so you can save up until the date. $200/3 pay dates = $66 you will need to save towards your goal.
As you can see from the Christmas example, the earlier you begin to save, the less you have to contribute per pay date.
My event is over and I have money left over. What do I do with it?
There are a few things you can do with the left over money.
- If it’s an annual event, use it to get a hard start on next year’s savings.
- If this was a one time event, add the money to another sinking fund to complete the goal faster.
- Apply the leftover money towards debt or savings.
So there you have it. Probably my longest and hopefully my most informative post to date. Still have questions? Slide into my DM’s on Instagram. I’m always happy to help.