Sinking Funds
What is a sinking fund?
A sinking fund is a sum of money that you set aside (usually by saving a bit each month) for a specific goal or purpose. Sinking fund money is completely separate from your emergency fund or savings account.
Advantages:
The advantages of using sinking funds in your budget is that you avoid those expensive months or times of year where all your money seems to go to a purpose. Back to school or Christmas are examples of this. With a sinking fund you already have the money ready so you avoid exhausting your savings or worse going into debt by using credit. Avoiding extra stress at already stressful times. Even if your currently paying of debt, sinking funds are a great tool to avoid increasing your current debt.
Disadvantages:
There are few disadvantages to sinking funds. To be successful with them you need to be disciplined and avoid dipping into them for other purposes if money short. They are also hard to do at times when money is low. However, I would suggest that regardless of how low money is, always have one for your most expensive time of year. This usually Christmas for most people.
How I use sinking funds:
I incorporate sinking funds into my budget by deciding at the start of every year which one’s I feel are important for my year. Christmas, back to school, holidays and birthdays are always used. The rest are depending on what is going on in my life for the year ahead. If I need something for the house, I set up a sinking fund for this. How large and how often you make a contribution is up to you. I usually add money depending on importance for example, I need back to school before I need Christmas. Some months I could contribute 50 towards sinking funds and other months it could be 500.
The two most important factors are:
- You intentionally save for a goal.
- You do not use for any other purpose.
I have a separate savings account which I use for the larger sinking funds. This account is for sinking funds only and I never remove money from this account, only for sinking funds. The smaller sinking funds I use cash envelopes for. I feel one of the most important factors is to name and track your money. I use charts both on envelopes and sheets. Name the sinking fund, mark the price and highlight in as you save.
My Top Tip:
My top tip with sinking funds is Over-budget! If you don’t know how much something is going to cost and you need to estimate the price, over price! This way you avoid stress with not having budgeted enough and with a bit of luck it might cost less than you expected, leaving you with extra money you can allocate to the next sinking fund!
