Sinking funds are separate savings accounts or “buckets” that are intended for a specific purpose. Let’s say for example that you are saving for a car. You could have a car sinking fund that you contribute to on a regular basis. Once you have saved your goal amount, you can use that money to purchase your car.
There are different types of sinking funds, including:
-College Fund
-Hobby Fund
-House Fund
-Retirement Fund
Why sinking funds are helpful
Aside from the financial benefits of sinking funds, there are a few other personal and motivational reasons for considering adding sinking funds to your financial management system.
Motivation
If you have a sinking fund, it can be a great tool to help keep you motivated.
Think about how motivating it will be as your sunken fund grows and you see that you are getting closer to achieving your goal.
For example, if your sinking fund is for a particular goal, such as buying a car, then it can be a great tool that keeps you motivated to continue contributing toward that goal. Think about how motivated you will be as your fund grows and you see you are getting closer to achieving your goal.
On the other hand, your sinking fund may be for an expected expense, such as property tax. In this case, you may not be all that motivated by the goal itself, but instead, motivated by the relief you will feel because you will have the money available to pay the funds. In this case, the motivation is less stress and being prepared.
Focus
Sinking funds keep you focused. For example, when faced with opportunities to spend money, you may consider your sinking funds and your goals before acting. Let’s go back to the sinking fund for a car. If you are ultra-determined to save enough money for a car, you may choose to contribute to your sinking fund rather than buy those great shoes that just went on sale.
Also, sinking funds help you create and stay focused on your monthly budget.
Pride
Imagine that you have now saved enough money for that car. Or, you have more than enough in your vacation fund to take that awesome trip you’ve been dreaming about. How does it feel knowing that you have the money to pay for it, without credit cards? What does it feel like to accomplish this goal you set out to do?
Some more examples of sinking funds:
Sinking funds can be created for just about anything. Expected expenses, future purchases, or financial goals. Below are some examples of sinking funds if you are looking for ideas. However, remember that nothing is right or wrong.
- Property Taxes
- Income tax – if you are not a wage earner
- Back to School Supplies/Clothing/Party fund
- Car
- Home
- Vacation
- Orthodontics
- Gifts – holidays, birthdays, graduations
- Pets
- Home improvements
- Clothing
How to manage sinking funds
There are a lot of different ways to manage sinking funds. You can choose the method that works best for your budget, lifestyle, and personality.
There really is no right or wrong way to manage sinking funds. I suggest finding the easiest method that makes sense to you. Remember, the objective is to keep track of the balance and stay motivated to contribute regularly.
Below are a few examples to consider:
Cash envelope method
This method is hands-on. Basically, you put your cash physically in an envelope that is labeled with your goal.
Separate savings accounts
You can open separate savings accounts for each sinking fund. This method works well. However, be careful that you are not charged for each account.
One savings account tracked separately in your software
This is the method I use. I have one bank account that has all my savings lumped together. However, in my Quicken software, I created multiple savings accounts so that I can track my balances and transactions for each sinking fund. When I reconcile my bank account, I add up the balances of all my accounts in Quicken and ensure that the sum matches the bank statement balance. Easy!! If you are not a Quicken user, you may want to try it. It’s pretty simple.
Summary
Setting up a sinking fund will help you get into the habit of saving, which is the first step in reaching your goals. It doesn’t matter what goal you want to reach. Even if it is something small, like saving for a new pair of shoes, you have to start somewhere, and having a sinking fund will provide that starting point.
Thanks for reading!
Stay balanced,
Jill