Just when you think you’ve got your money sorted something happens. You have been tracking every penny in your tracker, monitoring outgoings and trying to make changes. That’s great! But, there are things that inevitably get in the way of our good intentions. It always happens, right? Or, perhaps it’s something you have known was approaching but haven’t done much about it. Those annoying once-a-year expenses that no-one really does anything about. Well, that has to change.
Enter sinking funds.
What is a sinking fund?
Essentially, a sinking fund is another savings pot. In which you save small amounts over a certain period of time. So that, when the time comes, you have a pot of money already sat ready and waiting to be used as directed. You determine a number that would like to save, then divide it by the number of months away you are. For example, a Christmas sinking pot would be used in the holiday time. You know that it will be used during December so can save throughout the year for that event.
Why do you need one?
Well, it all comes to budgeting and planning. That doesn’t sound very exciting but it’s true! As an adult, we are responsible for all sorts of financial scenarios so we need to be prepared. Otherwise, you will be scrambling around for money at the last minute and may well end up using your credit card to cover the costs. Which isn’t ideal. But with a sinking fund in place, you can avoid all that.
With a sinking fund set up you can:
- Save for a holiday. Have family holiday planned for the summer? You can set up a sinking fund for holiday spending money, so you have a stash put away by the time you go away.
- Be prepared. Another expense that seems to be unprepared for is a car MOT. We all know that this happens once a year. So why not save for it? It’s a weight off your mind to be prepared for annual expenses.
- Save up for bigger purchases. Perhaps you want to re-decorate? Or upgrade something? Then set up a sinking fund for it! You can put your target and aim for that 🙂 nothing better than the feeling of purchasing something bigger than you can pay cash for.
- Deal with unexpected costs. Now, this is actually similar to an emergency fund, but you could have a sinking fund set up for those unexpected costs that crop up.
How do they work?
So, ideally you would contribute to your sinking funds each month. As part of your budget, you would add a section with sinking funds in and then separate accordingly. For example you might have:
- Christmas – £20 a month until December
- Birthdays – £20 a month, ongoing
- Car – £30 a month, ongoing
- Pets – £10 a month, going
The list is practically endless! But the idea about separating them rather than having one big savings pot is that your money is assigned to a specific expense. So when you buy something a birthday present, it comes out of the birthdays fund. The amounts will very much vary depending on how much you have in your budget and how much you are aiming to save. Some people might do much more in the birthdays fund than we might, but it’s totally up to you!
Where should I keep them?
So, if you use the cash envelope system then you might just add some more to them and have them as sinking fund envelopes. But, that does mean potentially having a lot of money sat in your house. There are certain banks that allow you to have different savings pots, such as Monzo and Starling.
Overall, I think sinking funds are a great idea! In fact, I have recently shared a video all about my own sinking funds set up which you can watch here. I feel much more in control knowing that I have separate funds set up for expenses that happen throughout the year. I just need to find the money to put in there now!
Have you heard of sinking funds before? Do you have them? Let me know!
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I’ve used ynab a budgeting ap for years and I use sinking funds all the time. My emergency fund is£1000 and if I use it I then top it back up . Funds save so much hassle and worry