- A sinking fund is a designated amount of money set aside per month for a big expense you know is approaching.
- Savings accounts have a different intention for your money. They’re often for unexpected finances, whereas a sinking fund has a certain goal amount for you to eventually use.
- It’s easy to start one or many sinking funds anytime, but if your budget is already tight, consider temporary alternative financing.
You can never prepare perfectly for big life expenses, but there are ways to have better control of your personal finances. With a sinking fund, you can plan for any upcoming expenses, like a vacation, new car, or home renovation. All you need to do is put away a bit of money each month into dedicated savings. That way, the expense is paid in full when the time comes, rather than borrowed from somewhere else.
A sinking fund could be your answer to staying on track to meet your financial goals. Read on to see the ways a sinking fund can benefit your personal financial needs and how you can set one up today.
What is a sinking fund?
A sinking fund is a strategic way to set aside money each month to save up for a specific personal goal. You can start one or multiple sinking funds anytime and adjust it to fit your lifestyle. For instance, you could choose to have a sinking fund dedicated to a vacation you have planned or a new car you want to buy.
The purpose of this saving method is to build up money for an expensive purchase over a longer time frame, rather than taking a chunk from your budget all at once. Saving in small amounts can go a long way toward improving your financial planning.
Sinking fund examples
Some common sinking fund categories can include:
- Travel and vacations
- Home maintenance and renovations
- New car or auto repairs
- Pet care
- A wedding
- School supplies
- Birthdays and holidays
- Medical (co-pays, prescriptions, dental visits)
- Annual memberships and subscriptions (Amazon Prime, Google Drive)
- Paying self-employment taxes
You can create a sinking fund for any financial goal unique to you.
What are the benefits of sinking funds?
Adding a sinking fund into your budget can be beneficial to anyone, no matter your spending tendencies. Saving for something specific, especially something you want or need, provides much more incentive.
Chances are, you’ll eventually need to replace something that wears out, purchase gifts for a special occasion, or pay a costly bill. If you’re not actively planning for these expenses, they’ll have to come out of some other part of your budget—whether it’s your regular savings, emergency funds, or put on credit cards.
With a sinking fund, you don’t have to worry because when the time comes, you’re already prepared.
Be prepared for the predictable. When you strategically plan for future expenses, you don’t have to pull money from other areas. You know exactly what you’re saving for and roughly how much money you need to save to meet your goal.
Save for anything. A sinking fund has no limits. You can save for anything you want and make it realistic for your situation.
Practice better budgeting. With no structure to your finances, it’s easier to let things get out of hand. You might spend more than you realize. Once you implement a monthly sinking fund, it can quickly improve your spending habits.
Have peace of mind. When it comes to making large purchases, the dent to your budget can be intimidating. You’ll feel better prepared knowing you’re making your budget stronger with a sinking fund while working toward what you need and want.
Is a sinking fund the same as a savings account or emergency fund?
You may already know the purpose of a savings or emergency fund and how important they can be in unforeseen situations. Having a sinking fund separate from your savings accounts dedicates your money to situations you plan to spend money on in the future.
A savings account doesn’t necessarily plan for a specific goal. The purpose of a savings account is to accumulate money in one place and spend it only when a big expense arises. Sinking funds can help you better track your finances in separate categories and see them individually grow each month.
Though similar to an emergency fund, the intention of the money is the main difference compared to a sinking fund. Emergency funds are for unplanned expenses, such as a sudden home or car repair, a medical emergency, or if you lose your job.
In these cases, you should have 3–6 months of regular expenses saved for possible emergencies. Money in your emergency fund is there to protect you. However, a sinking fund is for known expenses you plan to pay.
How much money should you have in a sinking fund?
A sinking fund is unique to you. It needs to fit your current budget and future financial goals.
You should have the necessary information to estimate how much money you’ll need to reach your sinking fund goal. Put away the amount that works best for your lifestyle each month. Even if that means putting away $100 per month, you’ll end up with an extra $1,200 at the end of the year.
How to start a sinking fund
Now that you know the essentials of a sinking fund and how it can benefit you, here’s how to start one in a few steps:
1. Determine the amount of money you want to save
Choosing what you want a sinking fund for is the easiest part. Then, you’ll need to figure out how much you need to save to meet that goal. Do some research and try to pay more to ensure you have enough funds.
2. Choose a deadline to meet your goal
Determine the time period to meet your money goal. How many months are you giving yourself to reach your goal in full? Take into consideration any upcoming bills or life changes you may have to realistically meet your deadline.
3. Calculate your monthly contribution
You can calculate how much money you should be putting into your sinking fund account yourself. Simply divide the total amount of money you need by the number of months you plan to take to reach your goal. That amount will be what you contribute to your sinking fund each month.
4. Set up your sinking fund
There are a few ways to set up one or multiple sinking funds. It can be as easy as penciling it into your budget. First, you’ll need to decide where your money is going to be.
You can set up separate savings accounts for each sinking fund at your bank. However, you’ll want to make sure you’re not accumulating unnecessary bank fees per account.
You can also use one savings account and take note of what percentage is dedicated to which particular sinking fund with a spreadsheet.
If you prefer to handle your money with cash, you can organize your sinking funds with labeled envelopes.
Are there alternatives to a sinking fund?
A sinking fund is essential for almost everyone to work toward. This way, large expenses can feel like any other. But if a sinking fund isn’t an immediate option, such as for those with a tight budget, there are a couple of other options available.
Plan strategically. You may not be able to contribute regularly to a sinking fund. But if you know a large amount of money is coming your way, you could add to it a few times a year. This could include a bonus in your paycheck, money you’re gifted for a holiday, or a decent return during tax season.
Reassess your current budget. This is the perfect time to create a budget if you don’t already have one. You may find areas you can take money from to contribute to a sinking fund, even if it’s just a little. Or you can borrow from certain areas to build your sinking fund now, and replace those funds later. You may also see an opportunity to start a sinking fund after smaller debts are paid off.
Consider a personal loan. If you’re someone who prefers to pay for things as they happen, a personal loan could get you the money you need fast. Depending on your credit report history, it could cover the cost of what you need now and allow you to pay it back over time with low-interest rates.
Pro tip: To get started with a personal loan, you can prequalify and check your rate with Upstart. Our model looks at factors beyond your credit score to find a loan and interest rate that you deserve.
Take on your next big expense with this smart financial strategy
At the end of the day, your money comes from the same place no matter what you’re buying. But with a sinking fund, you won’t ever have to feel defeated. Having one or many sinking funds takes discipline, but they help keep your budget more in line with your financial goals.Remember, a sinking fund only works if your budget has room for it. Always consider seeking alternative financial strategies if they’re more favorable to you at this point in time.