Sinking Funds and Peace of Mind

What are sinking funds? Basically, it is saving a tiny bit of money in a regular interval over a long period of time. There are two basic ways you can look at it: First, you may have a specific savings goal in mind. Say for example, your goal is to travel in two years. Your first step is to determine how much money you will need for your trip. If you get paid weekly, break that amount down into 52 weeks times two. (104 weeks). If your trip is going to cost you $3000 in total, then you need to save $28.85 every week for two years until the date of your trip. The second option is to set up a sinking fund that you continually pull money out of to use every now and then. For example, I save $50 every week for Costco, and we go there once a month. That means, if I need it, I have about $200 each month to spend at Costco. If I don’t need all of it, the remaining money sits in the sinking fund until the next Costco trip.

The trick of sinking funds is not to pull money out of your categories to spend in other categories. It is also important to maintain your savings habit. Sinking funds won’t work for you if you only add to them once in a while. Make a consistent effort to contribute to your sinking fund on a regular basis, even if that’s only once a month. Set up a payment plan for yourself so you know ahead of time how much money you’re working with. It’s ok to have many sinking funds at one time, but if you are a budgeting beginner, I would recommend to start small. Start out with the most important things, and then add to them when you can.

It is ok to put all your money together into one account, as long as you keep the categories separate. For instance, you might have $1000 saved. Of that, $500 could be for Christmas, $200 could be for an emergency fund, and so on. It’s important to write down how much you have in each category, how much you contribute to it each pay period and how much you remove or transfer.

Sinking funds are invaluable if you either don’t have a credit card or don’t want to maintain a balance on a credit card. (That happens to most people whether they want a balance or not!) Sinking funds allow you to save up for things you might not be able to afford in a moment’s notice. It’s nice to know that you can still afford the things you need or want. This is the point of a budget - to allow you to pay for the things that are necessary, but also to allow you to enjoy life as well.

Thanks for reading!

Sandra