Have you heard of a sinking fund? It’s time to shed some light on how to better budget for random or irregular expenses that only occur every few months.
Let’s start with a definition: A sinking fund is a separate savings account where you add money you know you NEED for the future. This could be several months or even years in the future. Unlike a regular savings account, a sinking fund serves the purpose of paying bills or expenses that are not monthly. (Whereas a savings account is more for emergencies or future investments like college or a new home.)
How often do you pay car insurance? Does you water bill come every single month? Do you make bulk purchases every few months? These are examples of expenses that could be paid through your sinking fund.
How To Start A Sinking Fund?
It’s time to begin, but how do I start a sinking fund? Before anything else, be sure you have a general budget for your income. A budget helps you understand how much you can afford to allot to your sinking fund. If you’re new to budgeting, no worries! The first chapter of my Living Off Less Guide can walk you through how to start a budget.
We started using a sinking fund because our month to month budgets were all over the board. For example, we pay our car insurance bi-annually, so every six months we’ve dealt with a bill for several hundred dollars. Instead of feeling like we always had to sacrifice money from our savings account to pay the car insurance bill, we’d pull money from our sinking fund. The idea of a sinking fund is to set aside smaller amounts of money each month to pay off big bills, instead of trying to just pay off big bills when they come.
To start a sinking fund, start by opening a new savings account. The right savings account can earn interest on your money while it sit in the account as well! Its a win win. Then divide the total payment for bills like car insurance or bulk food orders by several months, then deposit that amount into your sinking fund each month. When the payment is due, just pay with the money from the sinking fund. The sinking fund saves your monthly budget and even provides relief for months that feel like absolute savings flops. The idea of a sinking fund is to actually help SAVE you from sinking your own budget each month.
Sinking funds can also help motivate you to get the best prices and rates out there. If you car insurance fill feels too high, call around to other companies and ask for a better rate. Or if the pig meat your family wants to purchase still seems too expensive even broken down monthly, ask someone to split the pig with you. Get creative with how you afford all your expenses.
Can A Sinking Fund be Fun?
Bills and fixed expenses are just a starting point when it comes to sinking funds. A sinking fund can also be used to plan for the fun things in your life, like vacation or a new gadget. It could be your chance at finally affording a grain mill and berries, or your way of treating yourself to a pedicure every couple months.
Vacation is a FUN reason to start a sinking fund. Often, when we plan a vacation we just take money from our savings account. This can work, but it can be much more rewarding if you have a “vacation fund” each month. It’s something to work toward! Then, when you are ready to go on vacation you’ll already have the financial means to do so in your sinking fund.
Final Thoughts
For anyone wondering what savings account is best for a sinking fund, it’s really up to your own preference. We love Capital One for great interest rates on saving accounts. Just start a new savings account, name it “Sinking Fund,” and add money each month. Currently, when I log into our bank account, we have a checking account, a high-yield savings account, and a “sinking fund.” These three accounts help separate our money into clear categories. That is our method of saving, but you ultimately need to do what works best for you and your family.
If you have any questions about sinking funds or budgeting, inquire more in the comments, email at [email protected] or even shoot me a text! I’m always here to help and learn with you.
See ya next time!
Leave a Reply