Picture this. It’s Black Friday Sale. A good time to buy things at discounted prices. Items displayed are great for gift giving. You are at the store in a frantic state trying to figure out what to buy, Christmas Gifts and it’s your Birthday Month too. Even worse, you are trying to figure out why the heck you didn’t start saving money to at least get yourself a present.
Can you relate? I sure can!
What is a Sinking Fund?
Such a strange term. It is not a type of investment, it is a budgeting tool. A fund formed by putting a small amount of money aside over a period of time towards a specific goal. This allows you to prepare months and even years ahead of time for irregular and seasonal expenses that won’t wreck your budget.
How much to put in a Sinking Fund?
To set up your sinking funds, you will take the total cost / amount of months left until expense needs to be funded. For example, you are saving for a laptop and it costs £2,000 / 6 months goal, you would need to save £334.00 per month in your laptop sinking fund.
Where you should keep them?
This is a personal decision based on the specific goal that is convenient and comfortable for you. It is all depends on how long and how much you will be saving. I used to practice cash envelope, but temptation got me all the time! Personally, I try to keep a minimal cash with me at all times and have a separate multiple savings account for each sinking fund category to track easily. Depending on your sinking fund goal term the type of fund vehicle can vary.
For example, I plan to purchase a car within the next year. I recently opened an online account at a bank and it allows me to:
– Keep the money fairly liquid. I can easily transfer the money to my Debit Card if needed.
– Automated. It is automatically deducted from my account.
– Earn interest while the money waiting to be use. It’s only a small interest but every little helps.
– Remove temptation. Since it is an online account, I need to transfer the money and wait. Also there will be a bonus when it is not touched for a year. It keeps me from using the money for unintended purposes.
If you are saving for a home and you do not need the money right away, you could save your money in a less liquid option like mutual funds or any high interest savings account that will provide interest higher than a regular bank offers.
Benefits of sinking fund.
I know that my spending is completely intentional and that is planned for. I will be simply sticking to the plan and less chance of overspending. Sinking fund is a great savings strategy as it promotes healthy habit of saving, utilize the power of budgeting, and eases the burden of producing large amount of money all at once.