What is a Sinking Fund?
Trying to balance and accomplish all of your financial goals can feel overwhelming. I know how out of hand things can get when you’re trying to save up for family vacations, Christmas, and back-to-school shopping. My go-to tip for reducing the stress and saving for all of my financial goals is by using sinking funds.
Watch: Sahirenys Pierce answers your questions about sinking funds
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What’s a Sinking Fund?
A sinking fund is a savings strategy to help you pre-save for upcoming expenses and financial goals.
Instead of feeling overwhelmed and stressed out about approaching expenses like Christmas or annual car maintenance. With a sinking fund, you can break up these large expenses into bite-size pieces by saving up for them every month. This strategy can help you better plan for what you want without going into debt for it.
Types of Sinking Funds
You can use sinking funds to save for almost any type of financial goal. I love to organize my sinking funds by time frame to easily focus on my goals. My sinking funds fall under two categories: my short-term goals, and my long-term goals. I consider any goal that takes less than 12 months for me to accomplish as a short-term goal. Some of my go-to short-term goals are saving for birthdays, holidays, car registration, and my annual membership.
For long-term goals, I consider them to take longer than 12 months to accomplish, but less than 5 years. Some of the long-term goals I’ve saved for are my wedding, family reunions, and large vacations. You can also use sinking funds to save for other long-term goals like a new car, home downpayment, or large home repairs. The list of goals can go on and on.
How do Sinking Funds Work?
Now, you may be wondering, how do I use a sinking fund?
Let’s use the iconic example of saving for Christmas. We all know Christmas comes around the same time every year, but we always tend to fall short on savings. Leading a lot of us to go into credit card debt to make the holidays feel like the holidays.
Let’s say you want to go all out and get your two kids $100 gifts, your partner a $150 gift, and $50 gifts for five of your other family members. That is going to total $600 for gifts. Now, let’s not forget that you’re going to want to get some things on sale for yourself and the house. Let’s add an extra $250 to this budget, making your total Christmas budget $850.
- Kids = $200
- Spouse = $150
- Family Gifts = $250
- Home = $100
- You =$150
- Total = $850 That’s a whole lot of money!!!
If you’re starting in August, you have a total of 5 months to save up for Christmas. To save up for this goal, you need to divide your total Christmas budget by the months until you need the funds.
Budget ÷ Number of Months = Monthly Savings Goal
$850 ÷ 5 months = $170 Monthly Savings Goal
Where do Sinking Funds Go?
I am someone who believes in saving with purpose. When you use the sinking fund strategy, you are doing just that—saving with a purpose.
The financial goals that you are saving for, such as Christmas, should be saved in a savings account. I recommend looking into High Yield Savings Accounts (HYSA) since they offer a higher interest yield compared to traditional savings accounts.
How to Manage Your Sinking Funds
How do you manage all of your sinking funds and not get confused?
Look at your savings account as a holding place for your multiple saving buckets. One of the best ways to keep track of all of these sinking funds buckets is to go digital. You can find a lot of budgeting apps, finance apps, and even some banks that offer digital saving buckets to help you clearly see how much you’re saving.
Another go around here is to create a separate chart to keep track of your sinking funds. You can use Google Sheets or Excel to track how much is being placed in your saving account for any specific goal. Every month you put $170 in your savings account for Christmas, you make it a habit of updating your sinking fund chart. These are just a few ways to keep your sinking funds organized and properly funded to help you achieve your financial goals.
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Looking for more savings tips? Read this next: 10 Ways to Save Money on a Tight Budget: Creative & Easy Tips
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