With the purse strings tightening for many at the moment, budgeting is one aspect of money management that is becoming very important. A sinking fund is a tool to help you plan for your future needs. Learn more about how it works and how to start saving into one here.
What is a sinking fund? How does it work?
A sinking fund is a financial tool that many people use with the goal of saving money over time. It’s usually used with the aim of saving up towards a purchase or an expense, like Christmas.
You would set aside a certain amount of your pay each time you get paid in order to help work towards your future expense.
How do I create and use a sinking fund?
There are a few different ways to create sinking funds for your different needs, like retirement or a dream holiday: using cash envelopes, using different bank accounts or banking pots.
Start by listing what you need a sinking fund for.
Sinking funds can be used for lots of different things. The most popular include things such as … Christmas, birthdays, holidays, weddings, car repairs, car insurance, car tax, home repairs, home updates and so on.
Once you have your list you’ll need to figure out how much money each one will require.
You will then divide the sinking fund amount by the number of payday periods you have until you need the money.
For example, if Christmas costs you £1,000 every year and you get paid weekly, divide £1,000 by 52 to get 19.23. You would then save 19.23 every week (every pay period) into your Christmas sinking fund.
What are the benefits of using sinking funds?
Starting up a sinking fund is a great way to save money for expenses that are coming up.
This way the money is saved for the planned goal and it’s easier to actually see how much you have managed to save and what is still left.
Having a sinking fund (money set aside for future expenses) means that you’re saving for a rainy day. That way, when an expense pops up, you should have the funds available to cover it.
That should help you avoid going into debt or keep you from getting any deeper into it.
A sinking fund is a way of paying for annual expenses so that you can feel secure about them. It can even save you money as you can pay yearly instead of monthly for outgoings such as car insurance. One yearly payment will be less than monthly payments.
What different types sinking funds should you have?
Sinking funds are personal to you, but here are a few options of sinking funds that we think would be good for you to consider:
Long-term purchases
Purchases that are higher-value investments that require a longer time to save up for. These would be typically things like a home deposit, major renovations, wedding costs, and new car payments.
Regular annual expenses
Expenses that happen every year that you know about beforehand. This may include things such as Christmas, car-related costs, birthdays and so on.
Miscellaneous expenses
This might include expenses that are optional and nice to have but not always needed, such as a new haircut, buying new clothing, school uniforms etc
Concluding thoughts about sinking funds …
Sinking funds are a great way to save for something special, by dividing your money into different pots, or funds to be used in the future.
This method of saving can be used every time you receive your pay.
It allows you to save up for big expenses and save for any emergencies that may occur.