Sinking funds can help you plan financially for the future. Have you considered setting up one or more? If not, read on.
What is a Sinking Fund?
Think of a sinking fund as a savings account that you will use for a specific expense you know you will have at a later date. When that date comes, you then use the money from the sinking fund. This means you are prepared for that expense and don't have to find another way to come up with the money because it’s been saved in advance.
"While some expenses come out of nowhere, others are expected, making them much easier to budget," says Catherine Hiles at Time Magazine. (1) "A sinking fund can be used as a budgeting tool to help you save for specific future expenses that you know are coming. Using a sinking fund, you can save for the expense gradually over time rather than needing to use a credit card or use money from your emergency fund once you need to pay for that expense."
While a sinking fund serves as a savings account, it's different from an actual savings account because with a sinking fund, the saving is only temporary. It's also different from an emergency fund, which you also need to make sure you can get by in the event of a major financial crisis.
How Do You Create a Sinking Fund?
First, figure out what you want to save your money for, and determine if you want only one or more sinking funds, and the funds you need for each one. This way, you'll have clear goals to work toward. You can set up a savings account at your bank for each project, or, to save on bank fees, you can use one bank account and manually keep track of how much money in the account will be earmarked for each project.
Next, determine when you'll be making payments to the fund(s). Each paycheck? Each month? Put that amount into your household budget. These payments can be automatically scheduled to transfer from checking to savings through your bank’s digital banking system.
Reasons to Use a Sinking Fund
There are many reasons you might use a sinking fund. You may use one for a planned vacation, a new car, or any other significant expense that you plan on having. Maybe you have a child who is graduating or getting married, and you want to plan ahead for the party/wedding and other related expenses. It doesn't matter what the reason is. A sinking fund can help you save money for that specific goal.
Sinking funds don't have to be for large purchases. You may want to use one for back-to-school shopping for the kids, an unexpected (but inevitable) trip to the mechanic, or taking your pet to the veterinarian for annual vaccinations, for example.
What Are the Benefits of a Sinking Fund?
One major benefit of a sinking fund is making payment for your planned expense more manageable. It can be daunting figuring out how to pay for a significant expense when the time comes. Many people get in debt or deeper in debt to make the purchase happen. With a sinking fund, you can put as much or as little money into the account as frequently as you like, and it can build over time.
You don't have to feel guilty for withdrawing money when the time comes, like you might if you have to take cash from your primary savings account. That withdrawal was the entire point, so you will be using it for its intended purpose.
"Spending money can be fun or not fun at all. But at the end of the day, no matter what you’re spending your money on, it all comes from the same place," writes Rachel Cruze at Ramsey. (2) "And every swipe of your debit card can leave you and your bank account feeling defeated. All of that changes when you add sinking funds to your budgeting routine."
Sinking funds can be great tools for managing your money as you prepare for the future. To speak with a bank representative about setting up a sinking fund, you can make an appointment here.
1. https://time.com/personal-finance/article/sinking-fund/
2. https://www.ramseysolutions.com/saving/stop-the-panic-sinking-fund