Recently, I have seen a lot of other personal finance bloggers talking about sinking funds. Vacation sinking fund. New car sinking fund. Dream home sinking fund. At first I was like, why don’t they just call it saving money? However, if you aren’t using sinking funds, you should be. Here’s why.
What is a Sinking Fund?
A sinking fund is a method of saving money each month to go towards a specific purchase. Each month, you set aside some money in one or multiple categories to be used for a purchase or event at a later date. This makes it so that you are saving small increments of money over time instead of forking up everything all at once. You can create a sinking fund for just about anything. People have used them to reach financial goals, take dream vacations, and even buy homes.
You may be thinking to yourself, “what is the difference between a sinking fund and a savings account?”
The biggest difference is that sinking funds are more intentional than just general savings. You are saving your money to work towards a goal. If all of the various things you are saving for are kept in the same account, things are bound to get confusing eventually.
Benefits of Using Sinking Funds
There are a lot of benefits to using sinking funds. Think about it. If you take your family of four to the beach, that is easily $1,500. Christmas gifts for the same family can rack up some serious cash too. Here are some of the specific benefits of sinking funds:
- Save for literally anything you want. You make the decision on what your goals are and what you are saving for. A sinking fund simply makes your saving more intentional. You know exactly what it is going towards and, in some ways, that can be motivational.
- Plan extravagant trips or events. Whether you are planning your dream wedding or a trip to the Bahamas, a sinking fund can come in handy. You can make them as extravagant as you want, just set the monetary goal you want to reach.
- Stop feeling guilty about big purchases. If you are like me, there is a lot of anxiety around making expensive purchases. When you have a sinking fund designated for specific big purchases, however, you don’t have to feel guilty. The money was there and saved specifically for that purpose.
- Be prepared for inevitable expenses. Every year, we have to get the car registered and pay the taxes on it. Why does it always catch me off guard? October again? Having a sinking fund where a set amount goes away each month to reach the $500 that we need to cover that annually will help me be prepared for that expense.
My New Sinking Funds
Our family is saving for a number of things. Once we have our emergency fund flush with cash, we will be starting a few sinking funds of our own. Here are the categories:
- Car maintenance/registration fees
- New clothes
- Dream office
As you can see, these are purchases many people would be willing to take on debt for. They would either swipe a card or take out a line of credit, possibly even a loan. Sinking funds are great for anyone trying to be debt-free. It helps you avoid taking on debt for large purchases. Instead, you can plan and save. Sounds like a win to me!
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Amanda is an editor and writer. She has a passion for sharing information that helps people and communities to better themselves in some way. In addition to writing online, she also freelances for local newspapers in her hometown of Charlotte, NC.