Should You Create a Sinking Fund

Sinking funds are accounts where you put money aside each month for a specific goal. This is a separate fund or pot of money that you can use to protect your savings in the event of an unexpected expense.

It’s important to understand that creating a Sinking Fund can be the first step in crushing your goals on a consistent and passive basis. This post will explain the various types of sinking fund, how to create one, and what the benefits of the traditional “savings account” method are.

We will also discuss strategies to consistently put money towards your goal and tips on staying on track.

How do SINKING FUNDS work?

Saving for a specific financial goal is often overwhelming. A sinking fund can be a great way to reduce financial stress, and more importantly, avoid going over budget. You will put aside a small amount of money each month in a high-interest account to save for a future goal, like your child’s birthday, summer vacation, or Christmas.

These expenses may be a specific number. These costs may be in a specific area of your budget. For example, a routine oil-change or a goal that you work towards only occurs once a year.

You can set a date for when you want to reach your goal and then contribute consistently until you achieve it. It’s the opposite of what we’re taught: we finance everything we can’t pay for with cash in our everyday lives. Surprise! Surprise!

Set up automatic contributions to help you stay on track. Automating your contributions allows you to have your financial institution transfer a small amount each week or every month into your sinking funds. What’s the best part? The transfer will likely be so subtle that you won’t even notice it, but you’ll still reach your goal. As an example, I transfer $20/week into two different buckets. This is another $20 I won’t miss, because I am used to buying takeout or coffee without thinking.

Why do you need a Sinking Fund?

There are many reasons to do so!

Sinking funds can be valuable, because small contributions over time add up to a lot. Sinking funds allow you to save without pinching pennies, or feeling guilty for spending your savings.

This is a great way to offset life’s “expected emergency” situations. These are not the ones that will ruin your finances, but they can cause problems in your budget if you don’t plan for them. They always appear at the worst possible time.

PSI cover ALL of this in the latest edition of my book. Hint, hint, nudge, nudge.
Order Financial First Aid

What is a Sinking Fund used for?

Here are some examples to help you get started.

How to build an Emergency Fund

Contributing extra money from your monthly budget is a good way to quickly build up a cushion for unexpected events. I believe that having multiple emergency funds will help you protect yourself from the many uncertainties of life, including household emergencies, personal crises and more.

Tires for your vehicle – a new set of tires

Plan ahead and avoid being caught by surprise when the first snow falls, especially if your area is known for its inclement weather. You’re on my mind, eh?

Future Vacation

You know that it’s much easier to save money each month for a girls’ all-inclusive trip in the future? Stagette? What’s easier to swallow? Bottomless margaritas, which you know were not charged on your credit card.

Planned emergencies, such as a pet or home expenses

Calculate the cost of replacing your most expensive appliance or the average vet bill for your area. You could be considering a major home improvement like new shingles, or a big purchase like furniture.

– New phone

Have you ever paid for your phone upfront at the beginning of your plan? You will not miss any monthly payments or interest.

Wedding

You could save money for your own wedding or to attend the big day of someone close to you. You know someone who has been talking about destination marriages since highschool? Spend money on that fund.

This method will also help you to achieve your goals in the event that your financial situation changes or if money is required elsewhere within your budget.

If you miss one or two contributions, it is unlikely that your goal will be completely derailed.

What is the difference between a Savings Account and a Sinking Fund?

The main difference between a regular savings account and a sinking funds is the way you save. The schedule and frequency with which you deposit money into your sinking fund is usually much more regular than other goals.

Savings accounts are often left untouched because they exist without purpose and do not get used until the need arises. Sinking funds are powerful for me because I plan to use my entire money in the future.

How much should you save?

You can have as much money as you like! It depends on your current financial situation and your specific goals.

Say, for example, that you plan to go to Disneyland at the end the year. It is currently January. You’ll spend around $5,000 on the trip. You’ll have to save around $417 a month. This number is overwhelming. You decide to save $14 per day or $96 per week. You and your partner are saving money for a trip. You could save $7 a day to reach your goal. Saving for big financial goals can be made easier by seeing numbers in smaller amounts.

You’ll be far ahead if you don’t charge your trip to your credit card.

To help you get started…
Calculate your sinking funds for free

You only need to enter your goal amount and the date. You can name each fund and organise where your money is stored.

How do you start a sinking fund?

Step 1. Select your goal amount.

Step 2. Choose a date in the future when you would like to save that amount.

Step 3. Calculate the number of months left until your desired date.

Step 4 – Select an account to start contributing!

Great! You’re now on your way to preparing for “planned emergencies” so that your emergency fund or budget stays intact.

Where do I invest my money?

Neo financial is my favorite option for high-interest saving accounts and short-term goals. This online financial institution offers excellent savings rates (compared to other Canadian options), and also has great insurance coverage.

Consumers can use high-interest savings account to achieve their short-term goals with little to no risk. I currently have several buckets of savings, including funds to pay for holidays, home renovations, and vacations. These financial institutions are instrumental in helping me reach my goals every year.

Peace of mind is a great benefit from a sinking fund

Regularly contributing to a savings account with an end in mind can help remove the financial guilt.

Although similar to a regular savings account, a sinking fund has a different psychology. You may feel anxious if you need to withdraw money from your hard-earned balance. When you achieve your goal, using a sinking-fund strategy will allow you to say goodbye to guilt. It’s now time to spend your hard-earned money on something you had planned.

You’ll be pleasantly surprised to find that sinking funds are a great way to organize your finances and keep them on track!