When you hear the term “Sinking Funds,” the image that probably pops up in your head is a sinking ship with all your hard-earned money and life savings inside it.
Before you rebuke the idea of a Sinking Fund, you need to understand that it is, in fact, a great addition to your financial strategy. A sinking fund allows you to save for short-term projects.
Are you planning to go on vacation in December? You might consider creating a sinking fund.
Let’s discuss what a sinking fund is and how you can create one
What is a Sinking Fund?
A sinking fund is money you set aside for short-term projects or specific upcoming expenses. Unlike emergency funds, a sinking fund has a clear purpose attached to it.
Think of it as money you need for things that aren’t regular bills.
You can set up a sinking fund for the following;
- Car maintenance
- Birthday gift
- Home renovations
- Date nights
- Hair and Beauty
- Child expenses like a new lunch pack
- Social events
Why should I use sinking funds?
- Stay Organized: Keeping your funds in separate accounts will help you organize your finances.
- Avoid getting caught off-guard when you need to pay for an expense ahead. With a sinking fund in your budget, you can avoid touching your normal savings or emergency funds.
- Reduce stress: Planning ahead reduces the stress of running around at the last minute.
- Get ahead of debt: When you are well prepared to pay for future purchases, you will avoid taking on new debts.
How do I start Sinking Funds?
- Determine what you’re saving for and how much you will need: Since sinking funds are known future expenses, the first thing to do is to determine the expense and how much it will cost.
- Determine your timeline for saving: Set a timeline to which you want to achieve your endeavour. Understanding your timeline helps you break down the total amount into smaller amounts that could spread across months.
- Decide where you’ll save your money: Once you know how much you need to put aside monthly, it is important also to know where to put this money so as to know how to track it.
- Work within your budget: Now that you know how much to set aside monthly, it is also important to work within your monthly budget and know where the money you are saving is coming from. This may mean you have to cut down on some unnecessary expenses.
QUICK TIP: The longer you give yourself to save for a sinking fund, the less you’ll need to set aside each month. Consider prepping far in advance if your budget feels particularly tight.