How to create a sinking fund

A sinking fund is an efficient way to save money by setting aside a little bit each month in every category of your sinking funds . The term “sinking” likely refers to the decreasing level of debt remaining as it gets paid off.

So every month you keep a note in your budget about the sinking funds you want to transfer your money , you save up a small amount each month for a certain block of time before you spend.

Sinking funds are the most smart movements in order not have to pay for in a single month’s budget, like:

Christmas presents
Vacations
Birthdays
Wedding expenses
Car repairment

You can create a sinking fund for any financial milestone or dream you have! Remember : You save towards something fun!!!

Sinking Fund vs. Emergency Fund

A sinking fund is also different from an emergency fund. An emergency fund is money set aside for the unknown. I am going to write another blog post for the importance of the emergency funds .
But a quick meaning of emergency funds – I like to call the financial milestones – is money set aside for unexpected reasons ( 3-6 months expenses is the most usual)

With a sinking fund, on the other hand, you know exactly what that money’s for, and you know when you’ll use it.
The sinking fund is for the known. The emergency fund is for the unknown.

Now that you know what a sinking fund is, how they work, and why they’ll help you, here’s how to create one .

Decide what sinking funds you are going to crate .

So if you want to start a a sinking fund for your summer vacations . You want to put a little bit aside over time so in July you will be 80% ready to pay most of your holidays expenses without stress yourself for finding money the last minute .

Decide where you’re going to store your sinking fund.

If you want to open another savings account for a sinking fund, make sure the account doesn’t have a minimum balance to maintain (like a money market). Or you can use the envelope system and use different envelopes for each sinking fund .

Decide how much you need to save.

To determine how much you save, take the total amount to be spent and divide it by the number of months or weeks you have left until you need to make the purchase.
If you want to spend $1,500 on July for vacations and it’s February , you only have about 6 months to save. Which means you’ll see need a line item in your budget reminding you to stash away about $250 every month until July .

Set up your sinking fund in the budget.

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

I honestly find sinking funds an awesome way to save for events you want to plan ahead and usually these events are happy ones and you don’t want to be stressed out when it comes to enjoy them!!

With lot of care