One thing that terrifies me is not having funds to cover large expenses like annual home insurance payments, new tires for the cars, and all the other big ticket items that I know I will have to pay. In comes Sinking Funds to the rescue! Learn what a sinking fund is, how to calculate the amount you need, and of course how to set one up. A sinking fund can make saving for big ticket items stress free and help you plan your finances without worry!
What is a sinking fund
It is very likely you already employed a sinking fund at some point in your life. The simplest explanation of a sinking fund is setting aside money for the purpose of replacing something when it becomes obsolete, major maintenance that needs to be completed or to cover certain expenses that require a significant cash outlay.
The idea is that you set aside a small amount of money over a set period of time to save up for a large cash expenditure.
In other words, you know you have an upcoming expense so you plan ahead and set aside the money. That way when it is time to pay for it you already have the cash on hand. The obvious pros of doing this is it does not disrupt your budget and it will not cause you to go into debt unnecessarily.
Why should you have a sinking fund
With the understanding that a sinking fund is a fancy term for a very specific savings account. You may be wondering why you need a sinking fund and why would you even need more than one?
- Helps you plan ahead for expected expenses
- Helps you save for big, wonderful things you want
- Feels good when you do not have to use your credit card to cover the cost, not going into debt is a good thing
Which sinking funds do you need
Everyone is different in their financial planning needs. But there are some sinking funds accounts that are very useful to everyone.
Here is the list of must have sinking funds for every household.
- Vacation
- Holiday Spending
- Birthdays / Gifts
- Home Maintenance
- New (new used – better option!) Car
- Tires / Car Repairs
- Medical / Dental Expenses
- Auto / Home Insurance
- Clothes
- Technology Replacement (TVs, Computers, Phones, Tablets, Ect)
- Pets
How do you set up a sinking fund
Setting up a sinking fund is not a difficult proposition.
The First step is to decide which sinking fund savings account you want to set up. What are you trying to achieve? Saving to improve your home, go on vacation, pay for a new car when yours finally kicks the bucket?
Once you have made that decision, you will need to figure out an estimate of the cost for the item that will be purchased or improved. Think buying a car or putting a new roof on your house. Do this for each sinking fund account you want.
For example
if I was making a plan to purchase a new car in 5 years. I would take the amount of a new $18,000 car and divide it by the number of months until the cash would be needed.
- 5 years = 60 months
- $15,000 divided by 60 = $250.00 a month
Now that you have your list of sinking fund accounts and the estimated amounts you are saving in each. You will need somewhere to stash that money.
Saving in a Money Market Account is the way to go. You will get a very small amount of interest (better than nothing). But the money will not be at risk of being lost as it might if you invested it in the stock market.
Now that you have your types of sinking funds decided, the amount you will pay for each, and the accounts open. All that is left is the actual saving.
If you need some ideas to help get started on saving check out my posts to help:
8 Ways to save money without thinking about it
71 Ideas for a No Spend Weekend
Saving Money – Ideas to jump start your savings
Ideas for other sinking funds
Now that you have your main sinking funds set up and operating, maybe thing about future funds you can set up as well. Here are some ideas to get you started.
- Life insurance premium
- Property tax
- Summer fun
- Car costs (tags, gas)
- Trash
- Water / Sewer
- Braces
- Association / HOA
- Babysitting
- Life events (Graduations, Weddings, Anniversaries, Retirements, etc.)
- Car for your kid
- Babysitting / date night
Now that you have all the tools to start your own sinking funds you will have a better handle on your finances and your debt!
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