What is a Sinking Fund and How to Set Up One

What’s a sinking fund?

A “sinking fund” refers to saving up—a little bit at a time—for a single purpose. It can be for something special—like your wedding—or something more ordinary—like your twice-annual insurance premium. As long as you’ve got a specific target in mind and are saving for it bit by bit over time, it’s a sinking fund!

Here are some common reasons why people start sinking funds:

  • One-time expenses, like a new transmission or your mom’s birthday present
  • Infrequent expenses, like your quarterly water bill or twice-a-year oil change
  • Expected but unpredictable expenses, like unscheduled car or home maintenance (for example, a flat tire or a broken pipe)
How to Set Up a Sinking Fund

Dedicate an account to hold your sinking fund. It can be a run-of-the-mill savings account, nothing fancy, just a way to segregate the money. Naming it accordingly can help keep you motivated and avoid dipping into it for other things. Give it a tag like “Marta’s Wedding” or “Bali Trip!”

Keep the sinking fund separate from your everyday checking account so you’re not tempted to raid it for something else. It should also be separate from your emergency fund, which should only be used for events you can’t plan for like a visit to urgent care or a sick pet.

Some people have multiple savings accounts for different sinking funds. You may decide to save for a vacation, a new laptop and textbooks for next semester. Instead of saving for all three goals in one savings account, you can create a separate account for each sinking fund.

A sinking fund will only work if it’s in the budget.

So, whether you budget in Excel, in an app, or with a pencil and paper, put your sinking fund line item in the budget!

Sinking funds vs. emergency funds

Sinking funds and emergency funds are different. Your emergency fund is a general purpose fund for covering the necessities when life throws you a major curveball—you’d use it to cover all your living expenses if you lost your job, for example—while a sinking fund is for a specific purchase you’re planning to make.

And sinking funds are a great way to protect your emergency fund! You’ll be less tempted to dip into your emergency fund for non-emergencies when your other savings needs are covered.

Benefits of Sinking Funds

No matter what your money tendencies are—spender or a saver, nerd or free spirit, experiences or things—everyone can benefit from a sinking fund.
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. 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.

 


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